The Simple Answer to Scott Sumner

A lot of good links on EconLog lately, including this by David Henderson called "Protectionism IS Inflationary", a reply to this by Scott Sumner called "Protectionism is not inflationary".

In the former post, Henderson addresses the points put forth by Sumner in the latter post and--after recalling his and Sumner's common intellectual influence Uncle Milt's role in the revival of the quantity theory of money, according to which the price level and thus inflation is/are a function of the level of real economic activity, the (size of the) money supply, and the "velocity" of its circulation--characterizes Sumner's view as follows (readers can judge for themselves the fairness of this):

Protectionism makes y, real GDP, lower than otherwise. Scott and I agree on that. With an unchanged M and unchanged V, P is higher than otherwise. Therefore an increase in protectionism causes an increase in P. We normally refer to an increase in P, the price level, as inflation.

Scott doesn't dispute that. What he argues is that the current Federal Reserve Board will offset any increase by adjusting monetary policy, M, keeping the inflation rate at or around 2%. 

He may well be right, but that doesn't mean that protectionism is not inflationary. Protectionism IS inflationary AND the Fed can offset this inflation.

He ends by also quoting one of the comments on Sumner's original post:

If you have protectionism and all other variables stays [sic] the same (and therefore the Fed does not do any offset), protectionism is inflationary. If you assume the Fed does the offset, then you are changing two variables at once.

 ***

I note this only to finally ask a question that I've long wondered: am I missing something or does it really just take no more than this to deal with Professor Sumner's centrist-in-practice two-step?  

To see what I mean, consider the following post I had in the unpublished archives from at least July 2016, but probably from much earlier.  If it comes from a bona fide libertarian economist, does the argument against Sumner's argument form that we have seen and in what follows need to be no more elaborate than Henderson's and the commenter he cites?

Scott Sumner pisses off left-of-center people (and [New/Post/etc.] Keynesians, MMTers, etc.) like me

Consider the following short dialogues/conversations, that are very characteristic of SS's discourse with those of other economic views, especially (in response to) Keynesians:

1. SS: It doesn’t matter that state and local cutbacks negated much of the federal fiscal expansion. That the federal fiscal expansion didn’t help the economy/keep unemployment below 8%/prevent the recession/etc. proves the Keynesians wrong.

Ks: Well of course state and local cutbacks negated the effects of federal expansion. It’s kinda as if there was no federal expansion, so we didn’t really try my option.

SS: No, state and local spending are exogenous.

Ks: Ugh… 

And... 

2. SS: What will be the effect on GDP of fiscal expansion/stimulus? Whatever the central bank wants it to be. 

Ks: Well sure, of course the central bank could suddenly tighten to coincide with and in proportion to increasing federal spending. But what if they don’t? Then it will employ unused capacity to increase GDP until with hit the production frontier and fund only inflation, right?

...

Usually when we say some phenomenon does or causes another, it seems that "everything else being equal" is implied. Otherwise, as with SS in these instances/cases, it seems like responding to the advancement of the proposition that "its raining will make you wet" by denying it on the grounds that "not if you carry and umbrella". Well duh...

Sure, you can oppose the stimulus for other reasons like how government is worse at spending stuff to get a return than individuals are, or for other reasons (moral maybe), but I feel like people are being misled as they and the media apparatus that informs them get a simplified picture of your account and views, with perverse practical consequences. I think this is especially true because MM is easily portrayed as a moderate macroeconomic school between the partisan Ks and NCs and between the extreme MMTs and AEs, playing into the common tendency to pursue objectivity, reasonableness, moderation, compromise, and the middle. 

SS should give us the technical information to make our own choices. The federal government doesn’t control monetary policy, doesn’t know what they will do, and often it has looked like they even were way too tight, as SS himself as asserted. 

This is why I think (I think this is why) Scott Sumner pisses off liberals. 

---

This also makes me think again that the Fed should be given some fiscal authority for automatic stabilizers like infrastructure repair and investment. After the usual process of determining what ought to be built where, the Fed is given these projects along with a mandate to fund them/release the funds for them (whether financed by creating money or [regular] congressional appropriations) in accordance with their dual mandate. In addition to creating an alternative avenue for necessary projects to get done by removing them somewhat from the political process, it would give the federal a regional specific level to affect the economy. 

And would it slightly lessen the (CAP?) problem of non-coordination between monetary policy in one authority and fiscal policy in another?

Such projects would if course have to be classified as automatic though, so as to minors the effect on the (appearance of) discretionary budget and deficit. 

UPDATE:

There also seem to be conceptual confusions here.  Sumner can say that X doesn't boost inflation because X isn't the Fed and inflation is "always and everywhere a monetary phenomenon" but in the his post in the current issue, he writes as if inflation can be a price increase across many goods and sectors from non-monetary causes, but real ones including government policy.

"Kansas and Missouri fight for corporate investment and jobs"

2 states in a tug-of-war for workers that's costing millions

Perfect example of a collective action problem.  

(In this case) the dynamic forces them both/each to expend a lot of resources, which each only negate the other's; thus, both sides incur substantial cost(s) while providing basically no net gain.  This outcome is suboptimal for both as there are better possible outcomes for both sides, indeed a single alternate possible outcome that would be better for both sides.    

But if such a universal improvement, a pareto improvement in other words, is possible, then how both sides still experiencing this avoidable problem?

But both sides are also essentially forced into it; it's the rational thing to do.  After all, if they don't do it but the either side does, then they'll lose out even more.  Only if both sides stop doing it is the outcome better for both.  Thus, some agreement and coordination, presumably with mutually-acceptable/accepted enforcement provisions/measures in case of cheating/going back on,--in other words, law--is necessary for the best possible outcome in these kinds of cases.

***

As a typical/paradigmatic case/example of a common collective action problem, this example is important because it may be able to illustrate to those not otherwise sympathetic to centralization and government action/intervention/activism the soundness of the deductive case for it's being optimal policy in some circumstances, namely when the conditions sufficient for a collective action problem are present and the benefits yielded justify the costs incurred (and also maybe necessary is that no other pathology of government is worse than freedom's/market's pathology in this case/area).  

***

Hopefully states and localities can recognize this problem and band together resolved not to compete with other states and localities for economic activity by bidding with taxpayer money.  If federal legislation is not possible, then states should band together in the model of Common Core or National Popular Vote plan.  

***

Similarly, but more controversially, the same collective action problem that applies to individual states in the whole country also applies to individual countries in the whole world.  For this reason (among many others), it seems necessary that some level of world government will be necessary.  

In the same way that individuals voluntarily surrender some rights and assume some responsibilities in order to live in society, and just also as states voluntarily surrender some rights (nuclear non-proliferation for instance, or use of land mines) and assume responsibilities (to defend other states) in order to enter treaties with other states, gaining alliances and allies, states will, at least will need to, establish a common world government.

Too many collective action problems otherwise: impossibility of universal currency devaluation, Piketty on a global wealth tax, financial regulation, etc.

The process of globalization is a one-time only phenomenon, though of course long and difficult and must be managed right.  But the costs are mostly related to the process (as in economic, distributive costs, as there are arguments for other social and cultural costs) and not the outcome, so the economic benefits of the hopefully-long-lived outcome likely outweigh the costs of the temporary process.  

***

This phenomenon should also be taken into account when evaluating the economic and employment performance of different states, for the purpose of discovering/learning what policy should be undertaken at the federal level to boost employment or economic performance otherwise, or adjudicating between which candidates for federal office are better for the economy and employment than others' (which now sounds similar, even identical to the last question).