It must be a major embarrassment to the profession that us lowly MMs turned out to be more correct during the crisis than any other major group (New Keynesians, New Classical, RBC-types, etc.) and indeed more accurate than other groups on the fringes (old Keynesians, old monetarists, Austrians, MMTers, etc.):
1. It’s now obvious that Fed, ECB, and BOJ policy was far too tight in late 2008 and early 2009, but MMs were just about the only people saying so at the time.
2. We correctly pointed out that fiscal austerity in 2013 would not slow growth in the US because of monetary offset, whereas in a poll of 50 elite economists by the University of Chicago, all but one gave answers implying it would slow growth.
3. We pointed out that massive QE would not lead to high inflation, while many other economists on the right said it would.
4. We correctly predicted that the BOJ and Swiss National Bank could depreciate their currency at the zero bound, while many on the left said monetary policy was pushing on a string at the zero bound.
5. We pointed out that the ECB’s tightening of policy in 2011 was a huge mistake, which now almost everyone recognizes.
I’m a little puzzled by this. Unless I’m misremembering badly, prominent lefty economists like Paul Krugman and Brad DeLong have been saying most of these things all along. And while I’m not really quite sure if these guys think of themselves as New Keynesians or Neo-Paleo Keynesians or modified Old Keynesians or what, they’re basically Keynesians.
The only one of Sumner’s five points where there’s disagreement, I think, is #2, and I’d argue that this is a very difficult point to prove one way or the other. My own read of the evidence is that the modest austerity of 2013 might very well have had a modest effect on growth, but frankly, a single year of data is all but impossible to draw any firm conclusions from. However, it’s certainly true that there were no huge changes in the trend growth rate.
As for the others, the Keynesian types argued strongly that (a) conventional Taylor Rule calculations called for much looser Fed policy in 2008-09, (b) QE would not lead to inflation in the face of a huge demand shortfall and continued deleveraging, (c) monetary policy in countries with their own currency still had traction, but fiscal policy had a powerful role too at the ZLB, and (d) the ECB’s tight monetary policy in 2011 was nothing short of a cataclysmic disaster.
I’m sympathetic to the market monetarist advocacy of NGDP level targeting, but then again, so are folks like Krugman and DeLong. So in a way, it’s sometimes unclear to me exactly how far they diverge in practice, even if they subscribe to different theoretical fundamentals. My own tentativeness about NGDPLT is mostly practical: it’s not clear to me that central banks can even target inflation as powerfully as many people think, let alone NGDP levels. Part of the reason is that I simply have less faith in the expectations channel than many NGDPLT advocates. It seems like something that will work fine until markets test it to find out if the Fed really has the independent power to set NGDP levels anywhere it wants even in the face of investor panic, and then suddenly it won’t work anymore and the Fed’s aura of invincibility will be broken. And that will be that. But that may simply reflect a lack of understanding my part. Or perhaps just a lack of faith.