Scott Sumner is out with a new post making some rather bold assertions about last night’s BOJ announcement which sent the Nikkei Index surging 4.8%. Specifically, he says this action discredits Keynesian economics, RBC theory, and the theory of beggar-thy-neighbor policies. He says:
“Yes, these theories have been totally discredited dozens of times before over the past few years (or decades if you wish), but piling on is fun!”
Sigh. Let’s touch on that first one specifically since it is beyond comical.
First, we should note that the only reason Sumner’s new theory (Market Monetarism) even exists is because old school Monetarism was proven substantially flawed over the last 20 years. No serious economist adheres to the original beliefs of Milton Friedman and after many of Friedman’s ideas were debunked these “Monetarist” economists had to rebrand themselves around some new unifying set of ideas. The result of this rebranding is what is now known as “Market Monetarism”. It’s based on a lot of the same old defunct Friedman ideas, but with a new target (NGDP Targeting). So it’s rather comical to declare that a certain set of theories have been “totally discredited” when your new theory only exists because your original underlying set of theories was totally discredited to the point where Monetarists had to distance themselves from the original moniker.
But here’s the more interesting point he makes in reference to the idea that the BOJ’s announcement and the subsequent 4.8% rally in stocks proves something:
“Of course Keynesian economics predicts the QE announcement would have no effect on stock prices, as the new money would just sit there as excess reserves. You are just swapping one low interest government asset for another low interest government asset. (In fairness, I don’t know what the BOJ is buying in this case, but we also see big market effects when central banks just buy government bonds.)”
Sumner is saying that, just because the Nikkei rose 4.5%, then that means Keynesian economics has been wrong and Market Monetarism is right. How in the world can such a naive conclusion be made by such a seemingly intelligent person? Of course a Central Bank with legal authority to purchase assets on a secondary market (as the BOJ has) can cause the stock market to rise. If the Federal Reserve had the legal authority to buy out every S&P 500 firm that’s listed at a 100% premium then they certainly could. Does this mean that those firms are actually worth twice what they were before the Fed intervened? Does it mean the economy is twice as strong as before? Of course not. It just means that the Central Bank had the legal authority to buy stocks. The fact that Central Banks and markets often respond to events in silly ways does not prove or disprove anything. Scott is a big fan of looking at short-term stock market moves and then declaring a certain position to have been “proven”. It’s amateurish and silly – the sort of stuff you expect to hear from a day trading monkey with no real investment experience, not a macroeconomist….
More importantly, how does this “disprove” Keynesian economics? His reference to the Liquidity Trap is obviously a reference to “New Keynesian” economics. But New Keynesian economics ins’t even real Keynesian economics. New Keynesians could easily be called “New Monetarists” as Greg Mankiw explained long ago. New “Keynesian” economics is just tidbits of what Keynes believed in mixed with a heavy serving of Milton Friedman. So you get the Chicago School’s microfoundations, rational expectations, the natural rate of interest and lots of other essential pieces of Monetarism. This is not Keynesian. It is Monetarism!
Of course, this isn’t the first time that a Chicago School economist has declared the death of “Keynesian” economics. Robert Lucas famously did the same thing in the early 80’s right before the intellectual collapse of his own school….