Wednesday, November 11, 2009

Five Second ... Scott Sumner

Sumner's thoughts about our current recession are deeply important and well-worth reading. In three seemingly unrelated comments, here he is being pithy as well:

In other words [Krugman] makes an assumption ... that monetary injections are expected to be temporary. But that doesn’t mean monetary policy is ineffective in a liquidity trap, it just means that a silly and misguided strategy might be ineffective in a liquidity trap.

Socialism is what happens when right-wingers get in charge, create tight money, drive [nominal] GDP down, and create a lot of unemployment. In desperation the public then turns to the left. When money is stable (1990s) left-wing governments are not able to implement any of their big government plans, because the public doesn’t want to rock the boat.

6. Recessions should be unpredictable, if we are doing our jobs.
As James Hamilton once argued:
“You could argue that if the Fed is doing its job properly, any recession should have been impossible to predict ahead of time.”
Unfortunately, he then went on to talk about how we might better forecast recessions in the future. To the extent that economists cannot forecast recessions, we should wear that failure like a badge of honor. Would you want to fly on an airline that could forecast its own fatal accidents? The search for a recession forecasting formula is like the search for the Holy Grail. We’ll never find it. If we could forecast recessions we could (and would) prevent them. But we will eventually develop formulas that are capable of “retrocasting” past recessions, if that makes anyone feel better.

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