Sunday, July 29, 2012

Worth repeating: Ryan and Sumner

You have to know, Sumner puts up a graph of debt growth and says it is not important. So I am reading that post closely.

In the comments, Ryan quotes Sumner and responds:
“Forget about debt and focus on NGDP. It’s NGDP instability that creates problems, not debt surges.”

This is the closest I have ever seen of an economist saying “It’s not the fall that kills you, it’s the sudden stop at the end.”

In other words, NGDP is the result. The consequence. Policymakers are supposed to do things to make the economy grow, and economists are supposed to say why those things work or don't work. But Sumner is short-circuiting that process and saying in effect: "Let's just keep pumping up the quantity of money enough that NGDP always goes up." It's the sudden stop of economic reasoning. Ryan is right.

Sumner responds to Ryan:
I think you misread me. I am saying it’s the fall (in NGDP) that kills you. When you have a debt bubble but no fall in NGDP, you don’t get hurt. Or maybe I misread your comment . . .

Talk about off the mark!!! And I should say, Sumner, that economics requires more than clever miswording.

Ryan responds:
It’s like this: If rising debt causes a decrease in NGDP, then rising debt kills you. If NGDP falls for some other reason, then it is that other reason that kills you.

Changes in outstanding debt may cause a change in NGDP. Changes in employment may cause a change in NGDP. Changes in the money supply may cause a change in NGDP.

But in all cases, a change in NGDP is the result of some other factor. NGDP does not simply rise and fall in a vacuum, for no discernable reason.

So basically, what I am suggesting is that when you invite us not to “reason from” anything other than NGDP, you are correctly pointing out that it is the sudden stop at the end (NGDP) that kills us. On the other hand, you are moving us away from any analysis of why on Earth we might be plummeting toward the ground. It’s like trying to prevent suicides by analysing splatter marks on the sidewalk.

NGDP is the result.

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