A short history of the second monetarist counter-revolution
In praise of Scott Sumner
Corner of Broadway and W 42nd Street, early March 2009. Photo credit: Stephen Kirchner.
The FOMC meeting on 16 September 2008 was consequential in more ways than one. The Committee notoriously left the Fed funds rate unchanged even as the US economy was collapsing, a decision former Fed Chair Ben Bernanke later conceded was a mistake. It would take until December 2008 before the Fed funds rate tested the assumed zero lower bound.
A lesser-known consequence of that decision was that it radicalised a then obscure Bentley University academic by the name of Scott Sumner. Scott is much better known today thanks to his blog, The Money Illusion, which he started on 2 February 2009 to critique then Fed policy. Scott has now called time on his blog in favour of a new venture, making this is an opportune time to celebrate Scott’s enormous contributions since 2009.
I knew of Scott as a result of an article he had written on Japanese monetary policy in the now defunct Cato Journal. I was also aware of his work on nominal income futures targeting dating back to 1989. But it was only through his blog that he shot to prominence.
More than a decade on, it is difficult to over-state the extent of the intellectual disarray in the economics profession wrought by the financial crisis. I attended a special meeting of the Mont Pelerin Society in New York in March 2009 and it became very apparent that many of those attending, including several Nobel laureates, simply could not process, much less explain, what had happened. John Taylor was there making what I thought were ridiculous claims about the crisis being attributable to the Taylor rule residual. Niall Ferguson gave a characteristically superficial keynote speech to the opening dinner declaring the death of the Basle system of capital regulation. Anna Schwartz could only lament that Milton Friedman had recently left us ‘so young.’ The only bright spot was a Liberty Fund conference on the sidelines of the meeting, the subject of which was James Buchanan’s 1962 In Search of a Monetary Constitution. David Laidler and the late great Leland Yeager attended the conference. I was seated between them at dinner. Both were models of intellectual clarity.
Into this confusion stepped Scott and his blog. Scott’s analysis of the crisis was based on entirely orthodox economic thinking, so much so that it often consisted of reciting the contents of leading economic textbooks back at their authors who had somehow forgotten the implications of what they had written. If Scott’s underlying theory was orthodox, his conclusions were oddly out of consensus, but that only served to highlight the errors in that consensus. What Friedman and Schwartz did for the Great Depression, Scott did to the Great Recession, reinterpreting the 2008 crisis as a failure of post-crisis rather than pre-crisis monetary policy. The only other person who came close to having a handle on the crisis was another Scott, Scott Grannis, the retired chief economist of Western Asset Management, who still writes occasionally at Calafia Beach Pundit.
The new market monetarism
By 2011, Lars Christensen had coined ‘market monetarism’ to classify Scott’s approach and declared a second monetarist counter-revolution underway (the first being Friedman’s post-war revival of monetarism). However, the ‘new’ market monetarism had deep roots in a much older tradition. As Josh Hendrickson recently wrote, ‘Scott’s views are…sufficiently unique [relative to others in the monetarist tradition] that I think one could argue that it is Scott who has carried on the Chicago tradition in monetary economics more than any other monetary economist.’
By 2012, many commentators were crediting Scott with moving the Fed to a more accommodative policy stance. The Atlantic declared him ‘The Blogger Who Saved the Economy.’ As editor of the journal Policy (now also sadly defunct), I am pleased to have published Scott’s first long form treatment of his main thesis in 2013, which ultimately became a book length treatment in 2021, The Money Illusion: Market Monetarism, the Great Recession, and the Future of Monetary Policy. In 2013, I was also able to bring Scott to Australia to address the CIS Consilium conference. Scott was on a panel with future RBA Board member Ian Harper and future RBNZ Monetary Policy Committee member, Prasanna Gai (a contemporary of mine as an undergraduate at ANU). Scott also spoke at Economic Society of Australia events. Credit goes to Greg Lindsay, former Executive Director of CIS, for funding Scott’s trip. Greg was never completely sold on Scott’s argument, but thought it important enough to give it an audience. Â
Scott subsequently left academia to lead the monetary policy program at the Mercatus Center, allowing scholars like David Beckworth, Pat Horan and others to expand the market monetarist research and advocacy agenda.
The Money Illusion, the book, is not just an indictment of post-crisis US monetary policy, but also a standalone primer on monetary economics. Scott went on to write an actual primer which featured here in book club format. His 2015 The Midas Paradox: Financial Markets, Government Policy Shocks, and the Great Depression reinterprets the Great Depression in terms of gold reserve ratio and real wage shocks, perhaps the most coherent account of the Great Depression since Friedman and Schwartz. The Sumner trilogy is the best contemporary introduction to monetary economics, accessible to any lay reader.
Scott was also notably early in calling the recent inflation shock, highlighting in September 2021 the excess demand problem at a time when the economics profession as a whole was struggling to correctly identify the drivers of inflation. As I noted in this post, the claim that the recent inflation shock was unpredictable does not withstand much scrutiny given the many monetarists who called it, at least in terms of direction, if not magnitude.
Scott has launched a new blog at Substack, The Pursuit of Happiness. Regular readers of TMI will know that Scott’s writing already spans a much wider range of issues than monetary policy. Hopefully, the Substack medium will help promote Scott’s work to a new and larger audience than his standalone blog.
All of which is a very long-winded way of saying go subscribe to his new Substack.