Scott Sumner thinks I am too quick to bash other people's blog posts without first doing my due diligence:
Noah Smith is a very smart guy, but he has a bad habit of jumping into disputes without first discovering what the other side is actually saying. Indeed he recently admitted this after DeLong pointed out that his criticism of Robert Lucas was inaccurate.
Guilty as charged (though readers should note that said mistake was more of an attempt to defend Lucas than criticize him). The blogosphere is a place where we discuss very high-level ideas in very glib sentences, and whenever high-level ideas are discussed in very glib sentences, there will be a tendency to misinterpret people's claims. So a lot of these arguments are really just people talking past each other, which is kind of a waste of time. Like most econ bloggers, I engage in that sort of thing more than I should.
Sumner, who is an even smarter guy than I am, believes I have made another such error in this post of mine. He writes:
In his long post he spends a lot of time setting up foolish arguments that he imagines I might make, and then shoots them down. Unfortunately for him, I don’t actually make those foolish arguments.
Well, perhaps I did. Let's see what I said in my earlier post. I was responding to this quote of Sumner's:
Keynesian economists have never been able to accept my assertion that the fiscal multiplier is roughly zero because the Fed steers the (nominal) economy.
Now, I do admit that this sentence could mean several things! Let's consider three claims that could be represented by this statement:
Possible Claim 1: Because monetary policy can act in opposition to fiscal policy, the effect of fiscal stimulus depends crucially on how the Fed reacts to a stimulus.
Possible Claim 2: The data show that, in practice, the Fed does act to negate the effects of fiscal stimulus.
Possible Claim 3: Because the Fed can, in theory, counteract any fiscal stimulus, the effect of any fiscal policy on output should be considered to be zero.
So, let's look at these possible claims. Possible Claim 1 is a theoretical claim. It basically just says that monetary policy is always capable of counteracting fiscal policy. That claim is not logically inconsistent ("batty") at all. Arguable, maybe - since it depends on how effective you think monetary policy can be - but certainly not batty.
Possible Claim 2 is an empirical claim. Therefore, it can't be logically inconsistent or "batty"; only the data will tell us if it's true or not. Andy Harless and David Beckworth argued in the comment thread of my earlier post that this claim is true, and I'm certainly willing to entertain the possibility that it is true (though I must say I am skeptical).
Possible Claim 3 has two parts - a definitional part, and a theoretical part. First, it says that (3a) when we talk about the "multiplier" associated with fiscal stimulus, we should include the Fed's reaction function in the model that we use to estimate the multiplier. This is the argument made by David Romer in some remarks cited by Sumner:
As Robert Solow stresses in his remarks in this session, we should not be trying to find “the” multiplier: the effects of fiscal policy are highly regime dependent. One critical issue is the monetary regime...if [central banks are] successful [at offsetting the effects of fiscal policy], one would expect the estimated effects of fiscal policy to be close to zero.
This is just saying that there are several ways to define "the multiplier" - you can talk about the multiplier while holding monetary policy constant, or you can talk about the multiplier in the context of a model that includes the Fed's reaction function. If we look in the data and see that a fiscal stimulus was followed by an increase in nominal output, we could say that "The stimulus increased output," or we could say that "The Fed increased output by choosing not to counteract the stimulus." To borrow an old NRA slogan, it's a question of whether guns kill people or people kill people.
BUT, aha! Possible Claim 3 also involves a theoretical claim. This is the claim that (3b) the Fed's reaction function is invariant to fiscal policy! To see why, consider a world in which the Fed targets a 3% growth rate for NGDP if there is no stimulus, but raises the growth rate target in the event of a stimulus. In this case, it would make perfect sense to say "fiscal stimulus increased NGDP growth," in the sense that we normally think of causality. It would make no sense to attribute the growth increase to the Fed. That would be like saying "You think you put butter on that piece of toast, but actually it was I who put butter on that piece of toast, since I could have clobbered you on the head and stopped you from putting butter on the toast, and I chose not to. Thus, you are incapable of buttering toast; only I can butter your toast." That would be a truly batty claim!
And it was this claim, Possible Claim 3, that I believed Sumner to be making. Which is why I said it was "batty."
Now, maybe I was wrong. Maybe I misunderstood what Sumner was trying to say when he said "the fiscal multiplier is roughly zero because the Fed steers the (nominal) economy." When I go back and read that sentence again, it still sounds like Claim 3b, but that could be my minsinterpretation. Perhaps Sumner was only making a combination of Possible Claims 1, 2, and 3a. Perhaps he was saying that in the past, the Fed has counteracted fiscal policy, and can therefore be expected to do so again in the future, and that we should include that behavior in our definition of the "mutiplier." And if this was the totality of what he was saying, then I was indeed mistaken in bringing out Bat Boy.
But what kind of research would have allowed me to know that Sumner was not going on to assert Possible Claim 3b? I know Sumner has made Claim 2 in the past, but does that mean that that was all he was saying this time? When I read the phrase "the fiscal multiplier IS zero because the Fed STEERS the nominal economy," it sounds to me like a claim that the fiscal multiplier theoretically MUST be zero. Which would just not be true, since the Fed's reaction function might not be policy invariant.
So perhaps I was too quick to say that Sumner's claim was batty. It was simply the case that the claim I thought Sumner was making would, in fact, be batty (i.e. not logical). Perhaps I should have first asked Sumner "What exactly did that statement mean?" before assuming it meant what it sounded to me like it meant. Perhaps I was too quick to jump to conclusions, and ended up knocking down a straw man. And if so, I hereby revoke the Bat Boy from Scott Sumner and award it instead to anyone out there who does believe that the potential effectiveness of monetary policy means that fiscal policy is ineffective by definition...