The Blog That Got Bernanke to Go Big
Scott Sumner finally got a cell phone last year. Almost everything else in his Newton (Mass.) apartment would be familiar to a time traveler from the Great Depression, right down to the steel barber’s chair and brass cash register. His new Mac confuses him. “I like old things,” he says. Sumner, who stands with the rounded shoulders of an academic economist, teaches at Bentley University in nearby Waltham. And by sheer force of will, he’s changing the way governments respond to economic crises.
On Sept. 13 the Federal Reserve’s rate-setting committee announced a third program of quantitative easing, which it vowed to continue until it saw substantial gains in the labor market. This open-ended commitment was a shift for the Fed, which in earlier rounds of quantitative easing had simply targeted a certain amount of bonds to buy.
The Fed’s decision under Chairman Ben Bernanke to alter course has roots in ideas about setting targets for a specific percentage growth in nominal gross domestic product. Sumner has quietly promoted this approach to central banking for nearly three decades, especially over the last four years on his blog The Money Illusion. Sumner concedes that he’s “someone who doesn’t really know people at the top levels of the profession.” But after influential economics bloggers, such as Tyler Cowen, picked up Sumner’s ideas, officials from Sweden’s central bank and the British government got in touch with him. At a press conference in November 2011, Bernanke had to field questions about Sumner’s theories. “Sumner deserves most of the credit here,” says Cowen. “He turned the idea into an intellectual movement—and through his blogging only. A pretty amazing feat.”
Sumner, who holds a Ph.D. from the University of Chicago, made a suggestion in the late 1980s to the New York Federal Reserve. He proposed that the Fed set a target for nominal GDP—real growth in GDP plus the rate of inflation. He felt that this would induce the correct level of business investment better than targeting either inflation or growth in real GDP by themselves. The response at the New York Fed, says Sumner, was, “Thanks, but no thanks.” He returned to Waltham and grew bored with monetary policy. “There was a sense that [central banks] had figured it out,” he says.
He revisited the subject in 2008. In his view, the Fed initially responded too timidly to the crisis out of fear of provoking inflation. He also wondered why Bernanke was forgetting his own work as an academic, when he studied the Japanese stagnation of the 1990s. Bernanke in 2000 wanted the Bank of Japan to adopt “lead targeting”—publicly stating an inflation target of 3 percent to 4 percent for a number of years as a way of inspiring confidence.
Sumner decided to start a blog that argued for his old idea of targeting nominal GDP, which in a crisis means expanding the money supply until you reach your target. It also means swallowing any fears of inflation. Sumner is well known in his department as a technophobe, and he triggered expressions of surprise and amusement when he informed his colleagues that he was starting a blog. He was also aware of his own obscurity. “I had a fairly low opinion of my ability to change the debate,” says Sumner. Later, though, he saw signs that he was breaking through. One example: When Christina Romer, head of the President’s Council of Economic Advisers, returned to academia at Berkeley in 2010, she added his blog to her class reading list.
The announcement by the Fed’s rate-setting committee in mid-September doesn’t contain any mention of targeting nominal GDP. But its open-ended nature and clear goals—pump up the money supply until hiring rises strongly—resembles Sumner’s nominal GDP model, which would have a central bank do all in its power to achieve an agreed-upon nominal rate of growth. Sumner thinks the Fed should shed its fear of the “zero bound,” the point past which a central bank can no longer lower interest rates. The zero bound is a psychological barrier, he says. It prevents policymakers from taking more aggressive steps to respond to financial crises—aggressive steps like targeting nominal GDP.