Scott Sumner on Monetary Rules, Blooming Late, and the Death of Cinema

Episode Summary

Executive Summary: Scott Sumner argues that many economic crises are misdiagnosed unless viewed through nominal GDP: monetary policy errors, not finance alone, drive downturns, and flexible fiat regimes often outperform rigid exchange-rate pegs or gold standards once institutions and ideas evolve. The conversation also ranges widely across history, film criticism, and Sumner’s unusually late-blooming academic career.

Main Topics: Great Depression history and real-time interpretation (Priority: 5/5): Sumner explains how reading contemporaneous New York Times coverage of the 1920s-30s changed his understanding of the Depression, especially the uncertainty around Hitler, Hoover, and Roosevelt-era policy choices. Fiat money, gold standard, and monetary regime change (Priority: 5/5): He argues fiat money became workable only after long periods of painful experience with inflation and hyperinflation, and that policy ideas often lag what is technically possible. NGDP targeting and the causes of recessions (Priority: 5/5): Sumner defends nominal GDP level targeting as the best way to stabilize both inflation and real output, claiming that many recessions and financial crises are downstream of nominal spending collapses. Financial crises as symptoms of monetary failure (Priority: 5/5): He contends that banking crises and credit-market stress usually worsen because policymakers allow nominal GDP to fall, rather than being the primary cause of depressions. China, Japan, and exchange-rate constraints (Priority: 4/5): Sumner uses China and Japan as examples of countries tolerating deflation because of exchange-rate priorities, political constraints, or policy misunderstandings, despite having the ability to create inflation. Film criticism and changing artistic receptivity (Priority: 3/5): The latter part of the interview turns to cinema: Sumner discusses why older films, directors like Hitchcock and Ozu, and specific styles resonate differently with age and changing artistic horizons. Career path, Chicago economics, and late blooming (Priority: 3/5): Sumner reflects on his unconventional academic trajectory, Chicago training, early shyness, and how blogging transformed him from a loner into a public intellectual.

Key Arguments: Historical context matters because contemporaries do not know outcomes; reading newspapers from the 1930s revealed how little people understood Hitler, Hoover, or FDR in real time. Fiat currency was viewed as irresponsible for decades because of hyperinflation memories, but by the 1920s it had become workable in principle; policy norms changed slower than feasibility. Monetary policy should be judged by how rule-like it is, not by a false rule-versus-discretion binary; the Fed has become somewhat more rule-like over time. Most business-cycle volatility in advanced economies is driven by nominal shocks interacting with sticky wages, so stabilizing NGDP should stabilize real output too. Financial crises are often misread causally: the initial bank or credit problem is usually secondary to falling nominal spending, which worsens debt burdens and spreads distress. If a large institution fails and lowers equilibrium rates, the Fed should offset the shock to keep NGDP on path; this is not a bailout but macro stabilization. China and Japan’s deflation reflect political and exchange-rate choices more than technical incapacity; both could generate inflation by allowing currency weakness. Low interest rates can reflect prior tight money and deflation (the Fisher effect), so policymakers and economists often misread policy stance. Artistic masterpieces still emerge, but viewers may become less receptive with age; film appreciation depends on visual style, patience, and generational taste.

Data Points: Inflation average in U.S.: about 2% - Sumner says the Fed has been more rule-like over the last 30 years, with inflation averaging around this level. Earlier inflation range in U.S.: from almost 0% to double digits - He contrasts recent stability with the prior three decades of much greater inflation volatility. Chicago graduate admissions: about 60 students a year - Sumner recalls the PhD program admitting large cohorts and then flunking out roughly half. Attrition rate: about half the class - He describes strict prelims/core exams at Chicago in his era. Pre-2008 nominal GDP growth: 5% a year - Sumner uses this as the trend growth rate before the crisis in his counterfactual argument. 2008-09 nominal GDP growth: negative 3% - He cites this as the collapse in nominal spending during the Great Recession. Shift in NGDP growth: 8 percentage points - Calculated from the move from 5% to -3% growth. Real GDP in counterfactual: about 5% higher - Sumner argues that if NGDP had been stabilized, much of the shortfall would have shown up as stronger real growth. Inflation in 2009: around 0% - He notes actual inflation was near zero during the recession. Counterfactual inflation with NGDP targeting: 2% to 3% or a bit higher - Sumner suggests price inflation would have been somewhat above target but not dramatically so. Bentley tenure path: reapplied after being denied tenure - He says he later received tenure after producing more publications. Age next year: 70 - Sumner says he will be 70 next year and feels near the end of his active career. Life remaining, subjectively: 95% to 98% over - He emphasizes how much faster time feels in old age.

Pivotal Quotes: "the sovereign is he who decides the exception" — Tyler Cowen citing Carl Schmitt: Used to probe whether monetary policy can ever be rule-bound rather than discretionary. "don't reason from a price change" — Scott Sumner: His central methodological principle, applied to interest rates, exchange rates, inflation, and real wages. "I don't even think bailing out the financial system was the essential problem we faced in 2008" — Scott Sumner: He argues the real issue was collapsing nominal GDP expectations, not finance alone.

Implications: Listeners should see recessions, deflation, and banking stress through the lens of nominal spending and policy regimes. The interview reinforces Sumner’s case for NGDP targeting, while also showing how history, institutions, and even age shape what economists think is possible.