The moral case for NGDP targeting

The last few weeks have seen high-profile endorsements of having the Federal Reserve target a nominal GDP path. (See Paul Krugman, Brad DeLong, Jan Hatzius and colleagues at Goldman Sachs.) This is a huge victory for the “market monetarists”, a group that includes Scott Sumner, Nick Rowe, David Beckworth, Josh Hendrickson, Bill Woolsey, Marcus Nunes, Niklas Blanchard, David Glasner, Kantoos, and Lars Christensen. Sumner in particular deserves congratulations. He has been on a mission from God for several years now, and has worked tirelessly to persuade us all that central banks should target NGDP, and that they have to ability to do so even after interest rates fall to zero.

I have reservations about the market monetarists’ project. I’m not certain that the Fed has the tools to meet an NGDP target, or if it does have the tools, that the costs of deploying them to establish its credibility are supportable. Moreover, I don’t think that the market monetarists have sufficiently thought through the consequences of success, in accounting terms, if they restrict themselves to lending to the private sector (or, equivalently, purchasing debt instruments from the private sector). The market monetarists have grown in parallel with another fringe monetary theory, MMT. The two groups don’t consider themselves aligned, but I think they are two sides of the same coin. It would be great if they would combine their insights — the market monetarists with their NGDP-targeting central bank, the MMT-ers with their concern for balance sheet health and their understanding that transfers-to-be-taxed deleverage private sector balance sheets while advances-to-be-repaid do not.

But such quibbles are for another time. Here I want to join the market monetarists’ happy dance, and point out several moral benefits of NGDP targeting.

  • The most plain moral benefit of NGDP targeting is that it is activist. Relative to the status quo, it demands a serious effort to combat the miseries of depression. This is a big improvement over our current strategy, which is to shrug off and rationalize mass deprivation and idleness.

  • A second moral benefit is that under (successful) NGDP targeting, any depressions that occur will be inflationary depressions. Ideally, we’ll find that once we stabilize the path of NGDP, the business cycle is conquered and there will be no more depressions ever again. But that probably won’t happen. If depressions occur even while the NGDP path is stabilized, then they will reflect some failure of supply or technology. Our aggregate investment choices will have proved misguided, or we will have encountered insuperable obstacles to carrying wealth forward in time. It is creditors, not debtors, whom we must hold accountable for patterns of aggregate investment. There always have been and always will be foolish or predatory borrowers willing to accept loans that they will not repay. We rely upon discriminating creditors to ensure that funds and resources will be placed in hands that will use them well. Creditors allocate capital by selecting the worthy from innumerable unworthy petitioners. An economic downturn reflects a failure of selection by creditors as a group. It is essential, if we want the high-quality real investment in good times, that creditors bear losses when they allocate funds poorly. When creditors in aggregate have misjudged, we must have some means of imposing losses without the logistical hell of endless bankruptcies. Our least disruptive means of doing so is via inflation.

    I do not relish inflation for its own sake, or advocate punishing creditors because they are rich and the tall poppies must be cut. But if, despite NGDP stabilization, real GDP cannot be sustained, someone has to bear real losses. There are only two choices: current producers can be taxed in order to make creditors whole in real terms, or past claims can be devalued so that losses are borne at least in part by creditors. In my view, the latter is the only moral choice, and the only choice that creates incentives for investors to maximize real-economic return rather than, say, hide behind guaranteed debt and press politicians to ensure the purchasing power of that debt is sustained regardless of the cost to aggregate wealth. (Sumner makes a similar point in his excellent National Affairs piece.)

    Note that NGDP targeting doesn’t prevent the honorable Austrian remedy to credit misallocation: having creditors individually to bear losses via default and/or bankruptcy of borrowers. When it is possible to equitize or liquidate particular claims quickly and without creating terrible costs for the rest of the economy, we should do so. Every completed restructuring promotes real activity by reducing valuation uncertainty and debt overhang, and so reduces the degree to which an NGDP targeting central bank will need to tolerate inflation and spread losses to creditors generally. We should try internalize the costs of credit decisions via default and bankruptcy as much as possible, as doing so keeps investment incentives sharp. (On a stable NGDP path, we don’t have to worry so much that loans that should have been good turned bad because of a scarcity of aggregate income.) But whether it is particular bad lenders who suffer or creditors in aggregate, current producers should not be forced to bail out the bad or unlucky investment decisions of earlier claimants.

  • In fact, NGDP targeting, despite the stench of sugar-high money games that Austrians perceive in it, might actually increase our ability to impose losses on foolish creditors via default and bankruptcy. This would pay a huge moral dividend, in terms of our ability to avoid the unfairness of arbitrary bail-outs. Both Nick Rowe and Scott Sumner have suggested to me that if we had sufficiently aggressive monetary stabilization, we could avoid acquiescing to “emergency” rescues that flamboyantly reward bad actors, because allowing bad actors to collapse would no longer threaten the rest of us. Rajiv Sethi has made a similar point:

    The main justification for these extraordinary measures in support of the financial sector was that perfectly solvent firms in the non-financial sector would have been crippled by the freezing of the commercial paper market. But as Dean Baker has consistently argued, had the Fed’s intervention in the commercial paper market been more timely and vigorous, it might been unnecessary to provide unconditional transfers to insolvent financial intermediaries. While I do not subscribe to Baker’s view that Ben Bernanke “deliberately misled” Congress in order to gain approval for TARP, his main point still stands: if the Fed can increase credit availability to non-financial businesses and households by direct purchases of commercial paper, than why is any financial institution too big to fail?

    Perhaps we ought to think of “liquidationism” and stimulus as complementary rather than pin them to bitterly opposed camps. The palliative of stimulus might enable the medicine of consequences to work its pain without killing the rest of us. Obviously, fiscal and monetary interventions can be used to bail out failing incumbents, and as a matter of political economy, we might find ourselves unable to prevent this misuse. But precommitting to aggressive macro stabilization via tools that don’t discriminate in favor of particular firms or sectors might allow for more liquidation of bad claims than pretending we will be laissez-faire when the consequences of nonintervention would prove catastrophic.

  • In constrast to an inflation-targeting central bank, an NGDP-targeting central bank need not distort the division of income between capital and labor. Under current practice, the Fed tends to encourage asset price inflation but worries frenetically over any growth in unit labor costs, or, equivalently, labor’s share of income. Labor share of income has been collapsing since about 1970. I don’t mean to claim that the Fed has caused the collapse of labor share: globalization, automation, and deunionization would have put pressure on wages regardless of Fed action. But the credibility of the Fed’s consumer-inflation targeting regime is closely tied to moderation of wage growth. Managers, union leaders, and policymakers know that bargains whose effect would be to increase labor share might provoke contractionary monetary policy and even recession. This undoubtedly has had some effect. I don’t want to overattribute, but it seems more than coincidental that Rubinism and Clintonesque hypersensitivity to bond-market concerns arose after George H.W. Bush’s reelection was thought to have been crippled by cautious monetary policy and the jobless recovery it engendered. I think many labor-sympathetic observers view the Federal Reserve as an organization which tilts the scales against workers in subtle and unaccountable ways. I know that I do.

    An NGDP-targeting central bank trying to contract would be indifferent between restraining wage and capital income. Wage income growth puts more pressure on consumer prices than capital income growth, but under NGDP targeting it’s all nominal income. In practice, devils live in details, and how the Fed actually works to achieve its target might or might not be neutral. But labor has a better shot of being treated equitably under an NGDP-targeting regime than under an inflation target that is inherently threatened by wage growth.

It’s a bit ironic that the “market monetarists” are gaining prominence at the same time as “End the Fed” is a rallying cry of social movements across the political spectrum. It is a mistake to associate “End the Fed” solely with Ron Paul’s unpersuasive sound-money fetish. (Unpersuasive, because the Fed over its history has preserved the purchasing power of a dollar held in any financial instrument other than a mattress.) Many Americans, including me, feel a strong antipathy towards the Fed, not because of it has debauched the currency, but because we believe that it has played favorites in the economy and in politics, usually in the shadows but brazenly over the course of the financial crisis. We think the Fed behaves immorally and unfairly. An NGDP-targeting Fed could be a better Fed, in a moral as well as technocratic sense. I wish the market monetarists luck in trying to make it so.

Update History:

  • 25-Oct-2011, 3:30 a.m. EDT: Changed “Clintonesque hypersensitivity to deficits and bond-market concerns” to “Clintonesque hypersensitivity to bond-market concerns” in order to make an awkward sentence slightly less awkward.
  • 25-Oct-2011, 4:30 a.m. EDT: Changed “a loan” to “loans” to match plural subjects…
  • 25-Oct-2011, 11:45 p.m. EDT: Corrected misattribution of Sumner article to “Nation Interest”. The piece appeared in “National Affairs”. Many thanks to commenter Matt for calling attention to the error!
 
 

73 Responses to “The moral case for NGDP targeting”

  1. tv writes:

    This is an interesting take on targeting nominal GDP.

    Randy makes the case that those in power can use the breathing room that this creates to stop TBTF branding/categorizing/bailing.

    Current powers abrogate the Rule of Law.

    Since they abrogate already and targeting nominal GDP can create economic “growth”/breathing room, I suggest the powers will leave the TBTF alone (problems solved, let sleeping dogs lie) and further extract economic rent from nominal GDP growth. Go on with life.

    Status Quo.

    Moreover, the backside risk (other side of the coin) is an inflationary meltup (not necessarily hyperinflation) of some kind (the opposite of a deflationary collapse – same coin, other side.) The US can well avoid true hyperinflation but still have the majority of Americans purchasing power crushed.

    At least in a deflationary collapse, .Gov CAN “print money” to feed/house its people temporarily in that level of economic emergency.

    In an inflationary collapse, the more .Gov prints to “help” (help who again?…), the higher prices trend and the worse living life gets.

    High rates of inflation is theft, screws the conservative saver, undermines capital formation from savings.

    While I agree that nominal GDP targeting can be “used for good”, it will be whored out because the same miscreants/monetarists espousing it were in charge prior and during the 2008 Credit Crash (eg: Larry Scummers).

    To me, this is just more faulty thinking piled up on a solid, re-bar reinforced foundation of Moral Hazard: To avoid creditors taking the haircuts they deserve, to abrogate the rule of law, and keep those CEOs/.gov officials who caused the system to fail from jail/profit disgorgement.

    Those three are a metastatic cancer on our economic system that we, as a society, just Refuse to treat.

  2. TC writes:

    Great post Steve, once again.

    Similar to you, I don’t like monetary policy that much. I don’t think it works very well. And I think there are tons of reasons MP is immoral, and a bad policy lever even if it works as advertised.

    But…NGDP targets are superior to our current regime for the reasons you lay out here. I think the last reason – less anti-labor – is a such a gigantic reason that it swamps the others.

    This is because most of human progress that we actually consider important comes from a thriving middle class. Mass production requires mass consumption and all that – but we seem to have forgotten this basic tenant of progress.

    I’d also add it has at least 1 more moral benefit – it’s measurable.

    We can accurately judge the success/failure of the fed to meet its mandate under a NGDP target. Given the strange propensity of the U.S. central bank to run looser monetary policy for republicans, being measurable is important.

    I’d also say NGDP is more democratic, but I don’t have this thought in my hands yet. It keeps washing through my fingers when I try to pick it up.

  3. [...] interfluidity » The moral case for NGDP targeting [...]

  4. Nick Rowe writes:

    Good post Steve!

    “….the MMT-ers with their concern for balance sheet health and their understanding that transfers-to-be-taxed deleverage private sector balance sheets while advances-to-be-repaid do not.”

    Could someone parse that for me please. (Re-write it in simpler language).

  5. JKH writes:

    The moral case reverberates from the expectation of a superior long-run stabilization result, with lower volatility. That starts with a mathematical case. And the lower volatility makes the system resilient to “Austrian” solutions in the mix, at reasonable cost from a system perspective. The end and the means are different challenges. Krugman and DeLong would favour fiscal means, except for prevailing political obstruction; they join forces with the MM’ers now only because of this. This complicates the idea of “a” proposal for “NGDP targeting” and its endorsement. I think you are approving of the end here more than endorsing the means one way or the other. NGDP targeting is a purer idea than the MM form of it.

  6. JKH writes:

    Nick,

    My version:

    “Transfers-to-be-taxed deleverage private sector balance sheets”:

    Government deficit spending increases private sector net financial assets (initially cash) and equity (saving). This amounts to a net deleveraging of the private sector balance sheet in total, (and therefore somewhere). Whether or not the initial cash injection is used to pay down debt, the equity increase alone can be considered a deleveraging effect. And it strengthens the balance sheet so that a decision to use the cash to pay down debt is easier as well. Taxes can come later on, if eventually necessary for aggregate demand management.

    “advances-to-be-repaid do not”

    Central bank asset swaps do not change the equity position of the private sector balance sheet in total, and from that standpoint have no incremental effect on the private sector leveraged status.

    (Technically, private sector should be total non government sector)

  7. Joe Smith writes:

    Increasing nominal gdp does no one any good if it does not increase real gdp. We could double nominal gdp tomorrow simply by cutting the value of the dollar in half without affecting gdp. Inflation shifts the costs of bad investment decisions from reckless investors to the prudent and confers benefits on all borrowers – whether they need it or deserve it or not. There are losses that should fall on the bankers and bank investors.

    Inflation is theft. There is no moral case to be made for it.

  8. David Beckworth writes:

    Steve,

    Could expand on this statement: I don’t think that the market monetarists have sufficiently thought through the consequences of success, in accounting terms, if they restrict themselves to lending to the private sector (or, equivalently, purchasing debt instruments from the private sector).
    This may not be your point, but bank lending is not essential for the Fed to kick-start the economy with a NGDP target (though it probably would respond to the improved economic conditions such an approach would presumably create).

  9. Nick Rowe writes:

    JKH: Thanks. While my students were sitting their exam, I came up with another version:

    Policy 1. The government gives each individual $100 today and taxes back $105 next year.

    Policy 2. The government gives each individual $100 today and taxes back x% of each individual’s income next year. Where x is chosen so that the average tax per person = $105.

    A switch from Policy 1 to policy 2 is like a debt-equity swap. 1 is like debt; 2 is like equity, because the lender gets paid a percentage of the uncertain future income. So there’s less chance of insolvency under 2.

  10. Benjamin Cole writes:

    Excellent blogging. Keep up the great work!!!!

  11. JKH writes:

    Question:

    Does NGDP targeting imply “embedded inflation targeting” as a function of RGDP?

    E.g.

    Today’s environment: RGDP at 1 per cent (say) means an implied inflation target of 4 per cent, and a “true” monetary easing mode.

    Future hypothetical environment: RGDP at 5 per cent (say) means an implied inflation target of 0 per cent, and a monetary tightening mode (presumably).

    Changes in RGDP affect such an embedded inflation target iteratively. For example, if 5 per cent RGDP becomes 4, the inflation target is increased from 0 to 1, and the setting for tightening is reduced, or at least not increased (presumably).

    Also, should there be an implicit or explicit “equilibrium” target mix for NGDP targeting – e.g. RGDP of 3 per cent and inflation of 2 per cent?

  12. JKH writes:

    Regarding the “purity” of the NGDP targeting idea per se, I see no reason why MMT couldn’t adopt NGDP targeting using fiscal policy as the engine. However, that would require a formulaic approach to inflation risk that I haven’t yet seen from MMT. If implemented by MMT, it might mean a higher NGDP target, other things equal. Conversely it still might mean outright rejection of the idea by MMT, because of the formulaic approach. But I don’t think they should reject it merely because the MM’ers have recommended it in monetary policy form.

  13. devin_mb writes:

    That’s Karl Smith, not Blanchard, whose Modeled Behavior post you’re linking too. I dunno if Blanchard is a big proponent of NGDP-targeting, but Smith definitely is!

  14. Careful where you tread, Steve. What really brings the folks out to the barricades, an outcome which so many commentators lust after that they give unwarranted importance to OWC and the indignados, is inflation.

    Targeting the savings rate might get an economy more bang for its buck. Just think of it as reacting to the relative prices assigned to the present and the future at any point in time.

  15. TC writes:

    JHK,

    Ask and ye shall receive!

    The TC Rule for fiscal policy:

    http://traderscrucible.com/2011/06/21/the-tc-rule-mmt-inspired-fiscal-policy/

    The use of Okun’s implies a RGDP target. Also note that Orszag is ripping my IP off… :)

    Mosler thinks we could have much higher RGDP, so I propose a ratcheting rule for RGDP inside the TC rule. But that makes it so complex.

    I think there is an embedded inflation target, at least it seems that way to me. With the UK at 5.3%, it seems like there is about 2% inflation and 3% real growth targets implied.

    Matt R is rediscovering the FToPL it seems.

  16. Peter K. writes:

    Shouldn’t it be “NGDP level targeting”? Otherwise great post.

    Joe:
    “Inflation shifts the costs of bad investment decisions from reckless investors to the prudent and confers benefits on all borrowers – whether they need it or deserve it or not.”

    “Prudent” creditors have destablized our political and economic systems in a reckless manner. Because of the push to deregulate and privatize and heighten inequality by the “prudent” creditor class and their paid flunkies, we just had a near miss with another Great Depression. Actually Bernanke said it would been worse.

  17. [...] Update: Steve Walman at Interfluidity has a post on “The moral case for NGDP targeting”. [...]

  18. Detroit Dan writes:

    Ugh. Smoke and mirrors and the Wizard of Oz.

    How is the Fed supposed to raise NGDP? I feel sick…

  19. Detroit Dan writes:

    The Rogue Economics speaks some common sense regarding the (to me) totally absurd NGDP proposal. From Rogue Economist Rants:

    What happens when the fed buys up all of the financial assets from the private sector? I mean, this is how it expects people to go from hoarding money to actually spending it, right? Under NGDP targeting, the fed is expected to buy up all investment outlets (and possibly proponents will eventually propose to broaden the Fed’s mandate to buying up not just government bonds, but all sorts of private sector bonds, equities, commodities, real estate or what not….theoretically until the fed either owns everything, or until people are convinced to start buying stuff before the Fed purchases them out of the market). I mean this is the mechanism in a nutshell, isn’t it?

    So let’s lay out some scenarios. Supposing the Fed does buy up most if not all government securities. (This is assuming it takes that much before Investors are actually convinced that gambling, risking money is more preferable to just hoarding in today’s economic environment). So there are no more investment outlets for pensions funds, insurance funds, mutual funds. What then? Are we supposed to expect them to start investing in new startups? Risking equities? In even more exotic commodities? What if (and this is what I presume will happen) they just decide to return all that money back to the people? So now we’ve made insurance firms, money market mutual funds, pension funds redundant. And people who wanted to save money (either for retirement, for future education, for future health needs, or whatever rainy day) now can no longer do so, and instead have their money back instead. Will they use it spend on that new car, a bigger home, a new wardrobe? Or maybe they will they still insist on still saving that money? My guess is the latter, and they’d probably save even more, after all they still have to prepare for retirement, for future education, for future health needs, or whatever rainy day, and in the meantime they have no more outlets that earn interest.

    And what about banks? Suppose that in the Fed’s quest to ensure that holy grail of consistent 5% inflation (even in the face of 10% unemployment), it ends up buying up most if not all of the banking system’s government bonds. So now banks have no more risk-free outlet. They have to put all their eggs in 100% risk-weighted assets. Basel wouldn’t approve. Will they actually put those new reserves in new loans? I think not. Maybe they’ll just return the depositors’ money, or start charging people for keeping their money. So will the people start spending their deposits instead? My guess is no. They have to save even more just to pay those new excessive banking fees, and have to save even more because, with increased inflation expectations, they now expect to need even greater savings to fund that retirement, future education, future health needs, or whatever rainy day.

    So what happens if people are indeed convinced by the fed that inflation will indeed increase, and increase with absolute certainty? What prevents them from putting their money abroad? I mean, what mechanism prevents people who receive this newly-printed currency in exchange for their savings – from deserting to a foreign currency rather than spending it locally? A higher inflation expectation can cut two ways: It can cause people to spend their money now before it loses value, or it can cause people to put their savings in foreign currency, which is expected to keep its value. We’re right back to currency war, and now the US has just escalated the conflict. What would the likely international counterstrike be?

    Nick Rowe says that a credible central bank is a bit like Chuck Norris.

    Chuck Norris simply looks at the target variable, and it moves to wherever he wants it to go. It looks like magic. But it works because nobody wants Chuck Norris to carry out his implicit threat. So he doesn’t need to.
    This analogy comes from the market monetarist explanation of the ‘expectations shaping’ mechanism of NGDP targeting. I think the apt analogy would be Chuck Norris strapping himself with a bomb, and telling everyone that if nobody goes for the exits, then he will blow the whole place up. Everybody has to believe that Chuck Norris is willing to blow himself up if people do not follow his intent for them to take to the exits.

    So Mr. Bernanke, are you ready to blow yourself and the system up, just so that the people will start spending the money that 99% of them do not really have?

    This is pure gold nonsense…

  20. JKH writes:

    TC,

    Thanks.

    Let me point out some slanting but common ground for MMT and the MM’s. In a blog today, Lars Christensen calls Bennett McCallum “The Grandfather of NGDP targeting.”

    http://marketmonetarist.com/2011/10/24/bennett-mccallum-grandfather-of-market-monetarism/

    He links to the following paper by McCallum:

    http://shadowfed.org/wp-content/uploads/2011/10/McCallum-SOMCOct2011.pdf

    In that paper, McCallum says:

    “The central bank that targets nominal GDP would not have to rely upon its models of the way in which nominal and real variables are related, that is, its model of the “Phillips curve” relationship. That is a significant advantage, because the Phillips curve relationship is the component of quantitative (econometric) macroeconomic models for which professional understanding and agreement is, by far, the weakest. Thus, if the central bank can manage nominal spending growth in a manner that does not involve conceptually the Phillips curve, it can conduct policy without use of that elusive relationship.”

    I mention this because MMT has waged war against the Phillips curve. If you substitute fiscal policy (including ELR) for monetary policy in the form of QE, you have a rough analogy between hypothetical MMT NGDP targeting and MM NGDP targeting. After all, fiscal policy is, broadly speaking, open market operations in the swapping of money for negative equity (i.e. deficits). And ELR, crudely speaking, is open market operations in human capital.

  21. JKH writes:

    Correction:

    above, should be,

    “In a blog today, Lars Christensen calls Bennett McCallum “The Grandfather of Market Monetarism.””

  22. JKH writes:

    Nick # 9,

    a) Monetary policy: the central bank engages in asset swaps e.g. cash for bonds. The private sector ends up with cash as an asset and no change in equity (saving).

    b) Fiscal policy: the treasury through deficit spending swaps cash for goods and services provided by the private sector. The private sector ends up with cash and an equivalent increase in equity (saving). Through normal monetary operations, the treasury ends up swapping bonds for that cash. The end result is that the private sector ends up with bonds as an asset and an equivalent increase in equity (saving).

    If I’m interpreting you correctly, you’ve gone one step further and sub-divided b) in an interesting way:

    “ —————

    Policy 1 – The government gives each individual $100 today and taxes back $105 next year.

    Policy 2 – The government gives each individual $100 today and taxes back x% of each individual’s income next year. Where x is chosen so that the average tax per person = $105.

    A switch from Policy 1 to policy 2 is like a debt-equity swap. 1 is like debt; 2 is like equity, because the lender gets paid a percentage of the uncertain future income. So there’s less chance of insolvency under 2.

    ———————– “

    If you make the assumption that taxes are a certain cash flow, then policy 1 does look like debt. If you tax proportionately according to individual means (future income), then policy 2 reduces risk to the taxpayer. That I interpret as making individual debt contingent on the ability to pay, subject to the constraint that the debt in total must be paid by all.

    But that’s a different approach than the way I’m viewing the distinction between an asset swap with no private sector equity/saving effect and a deficit that creates private sector equity/saving. I haven’t capitalized future taxes anywhere in that comparison.

  23. winterspeak writes:

    SRW:

    Market Monetarists (like that Sumner) and MMT are like oil and water because MMT, fundamentally, is not about what to target, it’s about transmission mechanisms.

    Whether the Fed should target an employment rate or NGDP (however that’s exactly calculated) or inflation (with energy? with food?) is entirely a secondary concern compared to what, exactly, the transmission mechanism is for Fed policy.

    Rowe, Sumner, and Woosley have made ridiculous claims about this on my blog and elsewhere. Rowe, for example, has said in writing that higher inflation expectations would drive him to take time off work and buy luxury goods. Sumner would have the government swap more and more assets between itself. And Woosley would have government agents taking cash out of people’s pockets.

    It’s. Insane.

  24. Ashwin writes:

    I have nothing against NGDP targeting but everything against using monetary policy (Fed “liquidity” facilities and QE) to achieve it. Right now, we could buy up the entire outstanding stock of govt bonds and it will give us neither inflation nor growth. It will give us some insane asset price dynamics and kill the pension funds and life insurers who will die for the lack of risk-free duration to invest in.

    In trying to maintain the fiction of a neutral macroeconomic policy, we’ve ended up with a blatantly regressive variant of monetary policy obsessed with asset prices over all else. We need to replace the default to a simple helicopter drop + simple consumption/property tax as the hoover. I’m no fan of the ELR but even that beats current policy by a country mile.

  25. Nick Rowe writes:

    JKH: OK. We are on the same page.

    What’s behind my thoughts is that I see the current Fed’s balance sheet as abnormally large. And we need to make it larger still, temporarily, if the NGDP target is not initially credible. But any policy that is successful will require the Fed to eventually shrink its balance sheet in future, to prevent overshooting the target. That’s true whether the initial policy is asset purchases (MM) or helicopter money (MMT). So I’m thinking about the balance sheet effects of that next stage.

  26. JKH writes:

    The Market Monetarist approach to NGDP targeting seems to emphasize a QE transmission approach, at least in the current environment. But where the assets of the central bank are government treasury liabilities, any expansion of the central bank balance sheet, while monetary at the margin through asset swaps, becomes a fiscal transmission conduit on a cumulative or stock basis. The central bank balance sheet is used as one instrument of cumulative deficit spending, along with bonds. Indeed, the pre-crisis status quo Fed balance sheet was very much used as a deficit financing conduit in the final analysis, since the assets were mostly government bonds. That said, stuff like “twist”, which doesn’t expand the Fed balance sheet, has nothing to do directly with cumulative deficit financing – but the Market Monetarists aren’t emphasizing that sort of program for the most part.

    To date, the more straightforward brand of QE that the Fed has implemented (swaps of reserves for treasuries) has taken place alongside the rollout of deficit financing already underway via Treasury. But QE itself has not directly impacted the size of that deficit rollout. The Fed’s balance sheet in the final analysis has been used as a conduit for such deficit financing, but the Fed has obviously not been the instigator of deficit financing policy.

    If there is a difference between MM and MMT in the “transmission mechanism” for policy, it doesn’t really lie in the technocratic use of the Fed’s balance sheet. If by transmission mechanism, we mean the machinery of Fed and Treasury balance sheets, then MMT is entirely flexible. Some MMT proposals suggest elimination of treasury bonds, with an implied explosion of the Fed balance sheet into an “ultra-QE” mode, where the cumulative deficit is reflected entirely in currency and reserves. Some informally suggest the consolidation of Fed and treasury balance sheets in conjunction with that. Some suggest short term bills be used exclusively within the existing split balance sheet framework. Some informally suggest that no change to current balance sheet arrangements and their constituent components is necessary.

    But the real “transmission mechanism” for MMT-type policy is net deficit spending at the margin. The chosen balance sheet configuration for Treasury and the Fed serves as the conduit for policy, but is not the source of it. For example, a decision to stop issuing treasury bonds entirely would have dramatic “ultra-QE” type effects on balance sheets, but it would not represent the true point of origination for MMT policy. Net deficit spending is the point of origination.

    Conversely, it does appear that Fed QE in some form is the point of origination for monetary policy under Market Monetarism, at least in the current environment. Except for pure “helicopter drops”, this is remote from marginal deficit spending. But pure helicopter drops aren’t properly part of monetary policy to begin with. They’re fiscal.

    The idea of an NGDP target and the related QE transmission mechanism for achieving it are two different things. It seems to me that BOTH are essential to describing the nature of the NGDP targeting proposal as I understand it.

  27. [...] The moral case for NGDP targeting — Interfluidity [...]

  28. Ravi writes:

    @Joe Smith

    Recessions and unemployment are worse than theft, they’re *waste*. At least with theft, a thief benefits. With waste, no one does.

  29. Scott Fullwiler writes:

    Steve,

    Very interesting post. I especially liked the final paragraph, though it was all good.

    FYI, the corollary to an NGDP target in MMT is the job guarantee, or otherwise stated, sufficiently strong automatic fiscal stabilizers (I have several other ideas beyond the job guarantee (and TC above noted his own suggestions), which in the first place would need to be well implemented to stabilize as desired and on its own likely would be significant but also wouldn’t be enough according to simulations I’ve done). Note the “automatic” there–whereas some MMT economists regularly say that “we can raise taxes if the deficit gets too big,” I haven’t ever seen any specific proposals for that aside from applications to abnormal circumstances like the current situation (i.e., payroll tax holiday, etc.).

    Another point is that MMT’ers would argue that you can’t just rely on macro stabilization policy through fiscal or monetary means. Moving the economy to an NGDP or employment target now would still leave a financial system in dire need of re-regulation along Minskyan lines, in our view. Stabilization without stable finance just lays the groundword for the next, even bigger round of “stability is destabilizing.”

    Many other things I could say, though JKH has already noted several of them consistent enough with my own views that there’s not much to add.

  30. Joe Smith writes:

    @Peter K

    ““Prudent” creditors have destablized our political and economic systems in a reckless manner.”

    No, it is the reckless investors who bought under capitalized banks, overpriced mortgage backed securities and unsustainable sovereign debt who have destabilized the system. The Wall Street banks are all in favor of the Fed buying a broader class of securities as a way to bail out the banks from their recklessness.

    The banks and everyone who bought Greek debt or bank debt need to lose their shirts. Inflation shifts those losses to the people who refused to chase yield into risky investments.

  31. winterspeak writes:

    Scott: I don’t think the MMT job guarantee is a corollary to NGDP targeting. It’s a tangent. Suppose you hit your NGDP target but have 15% unemployment. Possibly if you had a major oil shock. Sumner would say everything is fine, but I doubt you’d be satisfied with that state of affairs.

    JKH: Exactly. Steve’s discussion of NGDP targeting in this post, and the ludicrous accounting-by-regression argument in the last post is like deciding whether the baby’s nursery should be pink or blue, while ignoring the unfortunate fact that the would-be-daddy is impotent.

    NGDP targeting proposals are nothing more than “gee, it would be great if the economy was growing more strongly. If the Fed said they want the economy to grow more strongly, it would!” with no consideration given to how the desires of Bernanke actually translates into anything.

  32. Scott Fullwiler writes:

    Winterspeak,

    I agree with everything you’ve said.

    My point was that we have our own preferred target that is essentially an “automatic” fiscal policy. That is, in the NGDP target paradigm, the CB adjust automatically to expectations of NGDP in markets; there’s no concern about policymakers getting it wrong because they have the wrong model or they otherwise exercise discretion and make things worse. In MMT, the job guarantee and other types of automatic fiscal policy do the same thing in theory–adjust the policy stance automatically without the need for a policymaker getting it “right.” Both of these attempt to overcome flaws inherent in Taylor or other types of policy rules that have dominated the macro theory/policy discussion for the past few decades. This is not to say there aren’t huge differences in how the transmission mechanism is understood, and so forth; there are, as you again point out.

  33. TC writes:

    JKH

    Note that the TC rule isn’t 100% MMT compliant – it was just inspired by MMT thinking. It won’t pass the KC econ department. Pavlina Tcherneva says it doesn’t target effective demand as well as the ELR, and she’s right.

    It turns out the fed probably uses something like the TC rule as a guide, with different weights for the u and i components. I found this out after I proposed it.

    The implied RGDP target that is part of the MM drive and the TC rule isn’t a good thing.

    Any rules that use some RGDP number as the “right” number have a design flaw. They accept the natural rate of interest/Phillips Curve fantasy. That’s why I was thinking about the ratcheting of the RGDP rate within the rule.

    I’ve been asking myself these questions over and over for the last few months: “What’s the maximum rate of RGDP growth if we are willing to accept any inflation rate to get it?” and “What is the maximum rate of risk adjusted RGDP growth if we are willing to accept any inflation rate?”

    These thoughts come down to a moral issue, and that’s one way I am thinking about these questions. The point SRW raises in this post aren’t just “NGDP targeting is morally superior for XYZ” – its that more growth is better than less growth, and NGDP leans to “more growth”, so NGDP level targets are better.

    I have lots of respect for Scott Sumner because of this – he wants more growth.

    Growth is good and makes lives objectively better. Hard economic times aren’t just low pay and less stuff – they cause divorce and heartache for good people.

    I’d accept 100% inflation if the real growth of our economy was 15% 15% means the real output of our economy is doubling about every 5 years. In 10 years, we’d have 4X as much stuff per year. Presumably, most people would be working during these times of tremendous growth.

    The natural rate of interest/Phillips curve thinking supposes that inflation is mostly bad. It’s hugely possible that we’re throwing away between 3-12% real growth per year due to distaste for inflation.

    Remember when the fed stomped on the brakes at the end of the 1990’s? We had 3.5% inflation. 3.5%. Maybe we could have had a few years of 6% growth instead of a few quarters, but had inflation of 8% too. Instead, we got a recession and low inflation – and the recession required a housing bubble to get the economy going.

    Would this have been actually bad to let inflation go up a bit higher and see what would happen in the economy?

    Also note that these questions about maximum growth are much easier to measure possible answers. Presumably, we’d get something like a laffer curve for economic growth against inflation rates. I called it the TC curve when I thought of it before, and it is Keith Moon style economics. I got it from reading stuff like McCallum and hearing crazy talk from Mosler about really high real growth rates.

    At some point, real growth matters more than almost everything else. Money is an illusion and more growth is morally superior to less growth. The distributional consequences of inflation have a moral dimension that need to be weighed against deliberately impoverishing our future selves.

  34. JKH writes:

    TC,

    I would think MMT should be in synch with SRW’s basic theme of moral choice and consequences here.

    I don’t know how in synch it would be with the idea of a math formula to “control” the implementation of that moral choice. It seems to me that the MMT policy orientation reflects the importance of policy responsiveness to adverse developments on the ground (e.g. using active, discretionary fiscal policy to respond to excess inflation) – rather than the importance of the anticipation or the risk management of those developments up front (although automatic stabilizers is a form of risk management). That general approach is not conducive to control formulation. I think Scott’s last comment is in synch with this. But your thoughts and earlier idea on it are interesting. It is an intriguing exercise to try and test MMT a bit in this formulaic direction.

    However these things are proposed, it should be acknowledged that implementing them initially in the context of the current disastrous environment probably reflects a requirement for transitional flexibility that one would never anticipate would be necessary once the proposal is up and running. I can’t recall, but I think Scott Sumner has proposed some sort of related flexibility in starting out NGDP targeting in such an environment.

    I’m not in favour of much higher than conventional inflation accommodation in any of these proposals – where that is interpreted as expected inflation accommodation, on average, through cycles. The morality of using inflation to punish creditors for bad decisions in recent times is different than the morality of using it similarly in a system that might be redesigned to allocate credit more appropriately from the get go.

    I think the strength of the NGDP target math per se is its cyclical constructiveness – which should allow for higher inflation when desirable, but not necessarily too much higher inflation as a concept on average. I don’t see why the latter should be necessary for any desirable expectation of real growth or employment. And again, it shouldn’t be necessary to skew inflation punishment toward creditors when the credit allocation system could be redesigned more fundamentally.

    As far as “not 100 per cent MMT compliant” is concerned, I refer you to a word from the wise on potential degrees of freedom and associated benefits:

    http://www.youtube.com/watch?v=SxuYdzs4SS8

    :)

  35. Nick Rowe writes:

    Scott: I’ve been thinking about your job guarantee plan on and off for the last year or two. I agree that it is (roughly) your equivalent of NGDP level path targeting.

    A couple of random thoughts

    1. Imagine a world in which gold is used as money, and any unemployed worker could go pan for gold and collect W ounces per hour. And suppose that the technology of gold panning improved at a rate of (say) 3% per year.

    2. Now replace the gold panning with a central bank that does the same thing, using paper gold. The workers employed by the central bank produce something else, rather than gold. This would be like a nominal wage level-path targeting system. It’s exactly like a Price level path target, except that labour replaces the CPI basket of goods as the commodity bundle.

    3. The level-path aspect of your (assuming I have understood you right) system would be nicely stabilising, just like the stabilising properties of price level path or NGDP level path targets. It works via expectations.

    4. Big fluctuations in the demand for money would mean big fluctuations in the number of people working for the central bank. We don’t really want that to happen. So it would be better if the “paper gold panning” changes in the money supply were supplemented by more conventional monetary/fiscal policy.

    5. In the limit, if the central bank watched fluctuations in the number of people working at paper gold panning carefully enough, and used conventional monetary/fiscal measures quickly enough, *all* fluctuations in that number could be eliminated. As soon as 1 worker shows up at the central bank to apply for work, the central bank loosens. As soon as 0 workers show up to apply for work, the central bank tightens.

    6. At that limit, we now have indirect convertibility of money into labour. Because the central bank doesn’t actually hire any labour in equilibrium.

    7. At that limit, this is now very very similar to NGDP level path targeting, except an index of nominal wages replaces NGDP as the target variable.

  36. JKH writes:

    Nick,

    “As soon as 1 worker shows up at the central bank to apply for work, the central bank loosens. As soon as 0 workers show up to apply for work, the central bank tightens”

    That’s vaguely why I described ELR earlier as, in crude (perhaps politically incorrect) terms, open market operations in human capital. Not sure if that’s quite right, but it’s the analogy that springs to mind.

    As I understand your version, the “threat” alone is sufficient via expectations. The same “threat” principle holds through the “announcement effect” when the central bank changes the conventional policy rate (a notion that I think some of you guys have resisted). OMO are not required.

    Mosler and others (maybe Scott) have written a lot about ELR as a “buffer stock”.

  37. Nick Rowe writes:

    JKH: “That’s vaguely why I described ELR earlier as, in crude (perhaps politically incorrect) terms, open market operations in human capital. Not sure if that’s quite right, but it’s the analogy that springs to mind.”

    That’s a fairly good analogy. The only way that analogy breaks down is that the CB can *buy* labour, but can’t sell it again (it can only buy less or stop buying). You can do open market purchases, but not sales.

    If we ignore that problem with the analogy, then what I was talking about was *massively negatively leveraged* open market operations in human capital. For every $1 of labour the CB buys, it buys (say) $100 of bonds.

    The simplest way to implement the plan, conceptually (and maybe practically), is let the central bank run the EI/UI system, but have the EI benefit follow a pre-determined (say) 3% growth path. If you indexed EI benefits to inflation, Scott’s plan would lose its properties as a nominal anchor, and the monetary system would explode or implode.

  38. TC writes:

    Nick and JKH,

    I agree the ELR It is the “equivalent” of OMO in human capital. In understanding modern money, Wray makes the point that this buffer stock of excess labor is used to keep prices in check, and this is both immoral and not very effective in promoting growth.

    Before we get too far, I’d like to point out we’ve only ever one time tried to maximize real growth at the expense of everything else – during WWII. During those few years, we put in 15% real GDP growth.

    1939-01-01 8.1
    1940-01-01 8.8
    1941-01-01 17.1
    1942-01-01 18.4
    1943-01-01 16.4
    1944-01-01 8.1

    That’s 18.4% RGDP growth. Inflation? In 1942 looks about 12%.

    There is no world where 12% inflation is not worth 18.4% real growth. We doubled our economy in 6 years.

    I’d argue it is a failure of imagination today that keeps us at 3.5%. Even worse, its a huge moral failure on our part because perhaps something like these rates of growth are possible today. Yes, we had rationing during the war – possibly we don’t need to emulate ever aspect of the War economy.

    These growth rates happened and waving our hands about and saying “well it was the war” isn’t an explanation. We put in the equivalent of a generation of 3.5% RGDP in 6 years.

    Why can’t we do something like this today?

    I say one huge reason is inflation fear. And it’s morally wrong to favor low inflation over high growth.

  39. Nick Rowe writes:

    TC: “Why can’t we do something like this today?”

    Because it failed miserably in the 1960’s and 1970’s, and Friedman told us why, and eventually every economist, including the Keynesian ones, eventually realised that Friedman was right. There is no way we should ever forget that very costly lesson from history, and repeat that mistake. If you use monetary/fiscal AD policy to try to target some real variable, the monetary system will eventually either explode or implode.

    “I say one huge reason is inflation fear. And it’s morally wrong to favor low inflation over high growth.”

    That’s exactly what we used to say in the 1960’s and early 1970’s, when we thought there was a stable long run trade-off between inflation and unemployment. Then we realised we were horribly wrong to say that. And the next generations paid a high price for our mistake. Forget it. Old Brits like me have been there and done that. Never again.

  40. winterspeak writes:

    JKH/Scott: I don’t think MMT’ers need Nick Rowe, Scott Sumner, or the ridiculous NGDP mechanism to be concerned about “moral choice and consequences”. We can be concerned about “moral choice and consequences” all by ourselves.

    The problems associated with ELR are actually, I believe, worse than those associated with NGDP targeting. NGDP targeting (as currently construed) is pointless and impotent, and therefore no different than current Fed policy as there is no transmission mechanism in macroeconomics. So it will have no impact.

    ELR, however, will be extremely impactful and fundamentally change the nature of the labor market, and the relationship between the Government and that market. Here’s an easy thought experiment: should employees in the ELR pool be unionized? ELR will quickly become EFR.

    In general, while I do understand the value of automatic mechanisms to take discretion out of Government hands, as we can see in our current state of macro-economic ignorance, putting it in the hands of academics is no better.

  41. Dan Kervick writes:

    It looks like there are two questions to be addressed: Of what value is NGDP level targeting is a macroeconomic policy target? And by what means could and should such a policy target be implemented, on the assumption that it is adopted as the policy target?
    Much of the debate between MMers and their new supporters, on the one hand, and MMTers and other critics, on the other hand, is due to the fact that the MMers present NGDP level targeting as a monetary policy. More specifically, they portray it as a central bank policy. This directs attention away from the first question – “Is it a good policy target?” – and tends to focus it on a different question – “How could (or could not) a central bank implement an NGDP level target policy?”

    The latter question then brings up lots of debates about the precise role of the central bank in the banking and monetary system, and the scope and means of central bank control over financial sector activity and real economic activity. I think a lot of these debates are familiar territory by now: the role of Fed statements and public commitments in setting expectations; the role of expectations on actual behavior of key participants in the economy; the role of interest rate policies vs. quantitative policies in determining bank, business and consumer behavior; the role of such factors as reserve levels, interest on reserves, money demand, liquidity demand; the legally permitted scope of central bank operations, etc. In a nutshell, I think it is fair to say that MMTers tend to think the central bank has much less power over the real economy than MMers seem to think it has, and they charge MMers with an inadequate understanding of the real-world banking system.
    But let’s re-focus. To separate the two questions cited above, let’s indulge the fiction that we possess a macroeconomic policy czar, with total control over all aspects of US policy: the treasury, the other executive departments, the legislative branch and the central bank. Any such czars would thus have a very large array of tools at their disposal for implementing macroeconomic policy.

    Imagine the czar is following an NGDP level targeting policy regime. Note that doesn’t really tell us a whole lot of interesting things we would like to know, since there so many different ways of implementing the regime, using vastly different combinations of central bank and fiscal tools. Some would involve high mixes of inflation with low levels of real growth; some would involve low levels of inflation with high levels of real growth. The same targeted NGDP level is presumably consistent with very different levels of unemployment, depending on how the czar implements the policy. Clearly the really important decisions would all have to do with values and policy judgments about what other policy goals to pursue.

    So isn’t all the real policy work being done by those other macroeconomic goals? And why focus on some NGDP level at all? NGDP targeting enthusiasts sometimes remind me of the soldiers in the old children’s story “Stone Soup.” The NGDP level targeters are asking us to commit to making some stone soup. But then all the really important issues arise over which meats and vegetables to throw in the stone soup, and how many of each kinds, and contributed by which farmers and chefs. (And, of course, one of the decisive techniques is supposed to be the presence of a revered and worshipped chef who says, “Let there be soup!”)

    Is NGDP level targeting an “activist” policy? Well that all depends on the environment. Any policy target will require vigorous action in an environment in which current levels or rates diverge significantly from the target levels or rates, and require steadiness or passivity in an environment in which levels or rates are close to target. NGDP level targeting doesn’t see many more intrinsically activist than any other kind of conventional macroeconomic policy approach.

    And one of the chief supporters of NGDP level targeting, Lars Christensen, says today that “NGDP Targeting is as close to “doing nothing” as you get.” He wrote earlier that,

    Market Monetarists are often misunderstood to think that monetary policy should “stimulate” growth and that monetary policy is like a joystick that can be used to fine-tune the economic development. Our view is in fact rather the opposite. Most Market Monetarists believe that the economy should be left to its own devises and that the more policy makers stay out of the “game” the better as we in general believe that the market rather than governments ensure the most efficient allocation of resources.

    This doesn’t sound like activist policy to me.

    Some argue that the very purpose of moving to NGDP level targeting in the present environment is to engineer higher both inflationary expectations and higher actual inflation. And yet some of the supporters of NGDP level targeting explicitly claim otherwise. When the key backers have such a diversity of concrete policy recommendations, what is actually going on here? Surely one should be suspicious of the degree of clarity and intellectual integrity in proposals that offer wildly different answer to fundamental questions.

    Some say the noncommittal broadness of the proposal is the very glory of NGDP level targeting. It allows for a wide range of policy debate on the best means of implementing the policy. Some even claim that a great thing about NGDP levels is that they are relatively easy to measure. But that’s a pretty weak recommendation. All kinds of things are easy to measure precisely because they give us such an impoverished level of information about a complex economy. What’s the real point of moving the NGDP level targeting if that policy target provides almost no answer to the host of concrete policy questions that ensue? Is the aim merely to set up such a weak and broad policy goal that we can at least get an illusion of consensus among bickering technocrats, pundits and economists? Are we now targeting “nominal agreement” as well as nominal product?

    Suppose we experienced a period of technological innovation and dynamism, with very strong real growth accompanied by relatively low rates of inflation, in such a way that NGDP growth started running well ahead of the target rate. NGDP level targeting would require the macroeconomic policy czar to act to cool things off. Not only that, since the policy requires level targeting, the supporters would apparently call for some extra-stringent “catch-up” cooling, bringing NGDP way below the current level, so we can get the overall recent average level back on trend.

    Does anybody really think this is either a good or realistic policy – to kill off a wave of dynamism due to the idea that nominal spending shouldn’t exceed some targeted level? My guess is that in these circumstances the tenuous emerging consensus around NGDP level targeting would rapidly evaporate. I suspect we would rapidly see the replacement of NGDP level targeting by some new and more appropriate policy target – or at least some new policy fad.

    The current faddish focus on NGDP level targeting as a central bank policy is almost entirely due, in my judgment, to immediate term political constraints on US economic policy, including a substantial amount of gross political dysfunction on the fiscal side. This is leading the policy class to try to load even more jobs on the central bank, jobs the central bank just cannot carry out, but which will provide the punditry with a convenient scapegoat when they fail.

    One has to ask: Do the supporters of NGDP level targeting as monetary policy really believe central bank operations are the best tool for hitting the target? Or are they just inclining to that approach because of political constraints and election cycle pressures?

    A key to the current lack of really vigorous proposals emanating from the economics punditry, in my view, is too much of the belief that the central bank either is or could be the chief macroeconomic policy-making body in the US. This belief is wrongheaded, paralyzing and dangerous. We have very fundamental economic problems, and the same fundamental problems will rear their heads again and again and again until we escape from these intellectual and technocratic doldrums. When NGDP targeting doesn’t do the job, some new formula or measure will be offered to take its place. We have already been through several epicycles of monetary policy fads over the past several decades. We have had one conventional and unconventional monetary policy fad after another. They never seem to work. The fundamental point to make here, and the one about which I believe the MMTers have the strongest case, is that the central bank just doesn’t have the kinds of powers that supporters of central bank-driven macroeconomic policy, think it does.

    It is really important for prominent pundits to pound incessantly on the idea that the most important macroeconomic policy-makers in our society are in the US Congress, by far. In a single hour, the US Congress could pass sweeping laws that would have a far more profound effect on both concrete economic realities and economic expectations than a year’s worth of central bank knob-turning, rate setting, asset-buying or pronouncements. And yet we are faced with the massive, and massively dangerous, problem that the current US Congress is at best grossly incompetent, and at worst both malevolent and derelict in its duties. If pundits continue to beguile the public with the false hope that the central bank can fix our problems, that we can avoid fundamental and essential political battles over the health of our economy by turning our hopeful eyes to central bankers, we can never organize the political pressure we need to get rid of our derelict Congress, or at least force it into action. It is a tremendous distraction of intellectual and political energy to keep chasing after these fanciful central bank-engineered fixes.

    And for any of you who have read this far, I thank you for persevering with another installment of “Kervick bungles his way through economics.”

  42. wh10 writes:

    Curious to see the experts here respond to Nick’s 1960s/70s claim. Commonly, this is where the buck ultimately seems to stop with him.

  43. winterspeak writes:

    wh10: Not to pick on Nick, but monetarists have a difficult time understanding inflation in general, and the 60s/70s in particular.

    There was an oil shock then, and higher prices in an energy input are going to be felt through everything. You just cannot substitute out of oil the way you can substitute out of bananas, so you will see a broad increase in prices across the board regardless of what happens to “base money”. This is “cost push” inflation.

    At the same time, you have many wage scales tied to broad based price indices, and also patterns of unionized wage negotiation that de facto work the same way, so you see salaries go up too. All of this is cost-push, none is demand-pull.

    The Fed hikes up rates and you get two effects going in opposite directions: 1) more interest income to the private sector (expansionary), and 2) higher costs for expanding private credit (contractionary).

    The MMT interpretation of these events is that there’s nothing you can do about cost-push inflation due to high oil prices, so your options are either inflation with high unemployment, or inflation without high unemployment, pick your poison. In the longer term, it’s good to wean a country off foreign oil. And we should index automatic wage changes (COLAs) to target inflation, not actual, recorded inflation (good luck with that!)

  44. Peter K. writes:

    Kervick:
    “The current faddish focus on NGDP level targeting as a central bank policy is almost entirely due, in my judgment, to immediate term political constraints on US economic policy, including a substantial amount of gross political dysfunction on the fiscal side. ”

    Note the derisive word “faddish.” The Fed’s dual mandate is to maintain price stability and low unemployment. It’s failing at its mandate but somehow for the press, politicians and culture at large it is not failing in a major way because the mandate is sort of vague. (Most citizens don’t know what the Fed does anyway. See “The Other Guys.”)

    A NGDP level target mandate would put the failure in much starker relief. Then they would be forced to either acknowledge they can’t meet the mandate and explain why or they would be prodded to more action. If they explained that they needed fiscal help in clearer terms, the public would be educated and motivated to push for more fiscal stimulus to meet the NGDP target.

    Where’s the evidence the Fed can’t do more? Where? The third quarter annualized growth rate is expected to be 2.4 percent. Would it have been that high absent QE1 and 2? Had the Fed not done unconventional policy you were against, the unemployment rate would be higher.

    Are you seriously arguing that it would have better to have higher unemployment to help prod politicians to do further fiscal stimulus? The worse, the better?

    The big tell for me is that opponents of more Fed action always whip out the “inflation” trump card as if that negates all of the logical arguments their critics are making. “Hey, look over here! Inflation!” It’s a red herring.

  45. Dan Kervick writes:

    A NGDP level target mandate would put the failure in much starker relief.

    Peter K., I was under the impression that the thing everyone is proposing is that the Fed should voluntarily adopt NGDP level targeting as a policy, in order to fulfill its existing legislated mandates, not that Congress establish a new mandate (which this Congress would never do anyway).

    How will the political and policy situation change with NGDP level targeting? Bernanke already explained in his most recent testimony that the need for fiscal policy action was “critical”. Response from Congress? Crickets. If the US Congress, and much of the punditry, is already fine with double digit unemployment – despite the Fed maximum employment mandate – what makes you think anyone will care if the Fed falls a few percentage points short in some NGDP level? How many people in this society actually pay any attention at all the the central bank and its policy speeches?

    Had the Fed not done unconventional policy you were against, the unemployment rate would be higher.

    Evidence?

    And QE2 ended in June. Yet you are crediting it for third quarter growth. Where’s the data? It’s a contested question. Some blame QE2 for increasing commodity prices. So how do we know that any positive effects of QE weren’t wiped out by the higher prices consumers and businesses had to pay for those commodities?

    And if people think what is needed is more quantitative easing, why not just call for more quantitative easing, instead of muddying things up with this NGDP business?

    Inflation is not all-important. But it is important. Many people on fixed incomes, or who have very little bargaining power in their jobs, will not see their nominal incomes rise in response to higher inflation, but will only fall further behind. The unemployed will probably feel a similar pinch. And some – but not all – of the people proposing NGDP level targeting have suggested that decreasing real wages is actually part of their purpose. They want to try decrease unemployment by helping businesses lower wages: a classic conservative approach akin to frequent conservative calls for lowering the minimum wage. Maybe I could get a nominal raise this year and even pay my mortgage slightly faster if we had some inflation. But I already have a job. The most vulnerable people in our society cannot afford to be hit with more inflation.

    Don’t you think that there is something very indirect and gimmicky about attempting to boost income and employment by prodding people, through the crude and doubtful social engineering of expectations by central bankers, to (hopefully) spend a bit more more money because they are expecting rising inflation? Why do so many economic policy professionals limit us to these Rube Goldberg tricks? It looks like pure hidebound ideology to me.

  46. JKH writes:

    Winterspeak,

    I think you’re having an effect.

    Nick has just put up his last Chuck Norris post.

    :)

    http://worthwhile.typepad.com/worthwhile_canadian_initi/2011/10/all-chuck-norris-really-needs-is-stamina.html

  47. [...] creditors should get bailed out, while debtors don’t get any help. But why should this be? Steve Randy Waldman makes a persuasive case that creditors have the weaker moral claim: It is creditors, not debtors, [...]

  48. H.Z. writes:

    You make me feel like I should dust off an old essay that I wrote in Dec 2008. I don’t need to repeat the point of targeting NGDP here since that would be praying to the choir. Instead I would argue that what is called for is numerically targeted deficit spending. In addition, to make it politically palatable I would argue that technology is there to run the deficit spending program with direct voter control — think of a voucher system where each voter can vote a certain amount of spending on a national market where public projects or whatever that are acceptable can be directly sold to voters.

    Here is the abstract:
    “In this essay I propose that the central bank be freed from its role of using interest rate policy to support aggregate demand. Instead, a truly variable public spending program is suggested to regulate aggregate demand. The program should be running constantly in order to minimize the time delay of fiscal responses. The amount of spending is variable and can be automatically computed from the realized nominal GDP so as to target a fixed growth rate for the nominal GDP. In order to gain popular support and avoid the pitfalls of traditional Keynesian stimulus programs, I propose that an electronic national market be set up to give voters direct control over where such stimulus spending is applied.”

    And here is the section on program implementation:

    “IV. An Electronic National Market for Efficient and Variable Publicly Directed Spending

    It is not hard to convince economists of the need to support aggregate demand to prevent economies from staying below their long-term potential for an extended period of time. Generating variable demand through the public sector to compensate for short-term private sector shortfalls is the most direct response. Supporting nominal GDP growth at a near constant rate is a natural outcome of such policies. The reason such policies are not implemented lies in the difficulty in implementing truly variable and responsive fiscal stimuli. Instead central banks have been relied upon to regulate aggregate demand through monetary policies. However, stimulating demand through low interest rates during economic downturns leads to asset price bubbles, which cause financial system instabilities.

    A critical goal of public spending to support aggregate demand is to influence private participants (lenders and borrowers, producers and consumers) to make rational decisions. To achieve this it must be fully established in the expectation of private players. Therefore such spending must be automatic and responsive to private sector fluctuations. Naturally there is the question of what to spend the monies on and how much to spend. A prolonged policy debate on each spending item could be both inefficient and ineffective (by taking away the certainty from private expectations).

    There must also be accountability to tax payers and the citizenry in general — to reduce perceived waste, to respond to voter priorities and to address anxieties about long-term fiscal impacts.

    The concerns about fiscal stimuli are both real and valid. They must be addressed for any fiscal policy tool to succeed. Fortunately new technologies are creating new possibilities to conduct such a policy successfully. In particular, Internet-based commerce has proven amazingly effective at creating a truly national electronic marketplace to match demand and supply among millions of participants. Financial security trading and auction markets like EBay are just two of the most successful examples. A national electronic marketplace can also provide a platform to give the citizenry unprecedented control over public spending. Therefore I propose that:

    A. A fiscal policy for a variable stimulus to the economy should be established through the force of law. The aggregate amount is automatically computed from the difference between the realized nominal GDP and the expected nominal growth. The national Treasury should be authorized to automatically borrow or draw from a reserve fund (these actions are outside of the regular budget) to create the necessary amount in an aggregate spending account.
    B. An electronic national marketplace would be established, whereby qualified entities would supply proposals for projects that require funding. Such entities would be vetted for their ability to carry out their projects as proposed if funding is provided, although such vetting is not critical since the marketplace itself could provide effective policing over time. It may be necessary to vet the proposals in terms of speediness and the multiplier effect of the spending.
    C. Each taxpayer or voter is given a pro rata share of the aggregate Treasury spending account to “spend” in the electronic marketplace. One can choose to contribute one’s share to any number of spending proposals. He or she should be able to access new proposals, review prior year results and the qualifications of proposers. Development of online communities can be facilitated to encourage exchange of information and ideas. To remove the effect of voter apathy, unused shares would expire after a certain amount of time and be reallocated to active voters on the marketplace.

    The technological feasibility of such a system is beyond doubt. The direct control provided to the taxpayers or voters in general would provide the ultimate accountability. Over time many public and private entities could establish their reputations and competitiveness in winning bids for project funding. Certain active voters could also establish their reputations and considerable influence over others. In other words, the market will evolve and mature and become the best possible way to match supply and demand within the legal parameters of variable public spending. The advantage of giving voters control over a variable budget instead of tax rebates is that there is no doubt that the propensity to spend “other people’s money” is much higher than to spend a tax rebate. Also, unlike tax rebates, the voting credit can be easily reallocated to ensure that the spending target is hit.

    While the amount of the spending is unknown ahead of time, the response is swift and can also be continuous. That is, the aggregate spending account can be constantly recharged at varying rates in response to private sector conditions. During good years the variable spending could be minimal since it is formulaically determined, therefore it is truly counter-cyclical.”

    Obviously there are a lot more finer points to how to make a market like this work. I would be happy to send you a copy of the whole essay.

  49. Peter K writes:

    Basically Dan I see you as arguing for the perfect against the good at the unemployed’s expense. Are you familiar with that argument? At first I was skeptical of NGDP targeting but your criticisms have made me look at it more favorably. You always insinuate that all proponents of NGDP targeting argue that fiscal policy isn’t better when they don’t and anyone who can read knows they don’t. Why do that?

    Peter K., I was under the impression that the thing everyone is proposing is that the Fed should voluntarily adopt NGDP level targeting as a policy, in order to fulfill its existing legislated mandates, not that Congress establish a new mandate (which this Congress would never do anyway).

    Seems like a minor point. If they don’t do it voluntarily they could be forced by Congress.

    How will the political and policy situation change with NGDP level targeting?

    Why don’t we try it and find out or are you okay with mass unemployment?

    Bernanke already explained in his most recent testimony that the need for fiscal policy action was “critical”.

    Link? The phrase “fiscal stimulus” doesn’t even appear in his October Boston speech. My guess is that Bernanke thinks fiscal policy would help and has helped but he’s okay with the current trajectory of the economy. High unemployment doesn’t bother him that much. Deflation does.

    If the US Congress, and much of the punditry, is already fine with double digit unemployment – despite the Fed maximum employment mandate – what makes you think anyone will care if the Fed falls a few percentage points short in some NGDP level? How many people in this society actually pay any attention at all the the central bank and its policy speeches?

    Again, why not try? I get the sense that you don’t feel the need to bring down unemployment is that urgent. I think it would work. Maybe it wouldn’t.

    Inflation is not all-important. But it is important. Many people on fixed incomes, or who have very little bargaining power in their jobs, will not see their nominal incomes rise in response to higher inflation, but will only fall further behind.

    Why would monetary policy cause inflation if fiscal policy wouldn’t? In the 1970s Carter had a highly stimulative federal budget along with the Fed’s loose monetary policy along with other factors that don’t apply today. Full employment would cause inflation. You don’t seem to understand this.

    Conservative warnings of hyperinflation today is like calling Fire! Fire! in Noah’s flood.

    “Why do so many economic policy professionals limit us to these Rube Goldberg tricks? It looks like pure hidebound ideology to me.”

    It’s really simple if you understand it. The alternative is to do nothing something you refuse to face for some reason. You say inflation will hurt the most vulnerable? Well doing nothing is hurting the most vulnerable.

    Saying inflation hurts the most vulnerable is like the saying taxes hurt the most vulnerable. Except that high-tax Europe with its social services treats its most vulnerable better than the U.S. does.

  50. Matt writes:

    National Affairs, not National Interest!

  51. Dan Kervick writes:

    Again, why not try? I get the sense that you don’t feel the need to bring down unemployment is that urgent. I think it would work. Maybe it wouldn’t.

    I think it is extremely urgent. Unemployment is a national emergency, which is why we should’t be tinkering with sideways and inefficient monetary fixes to attack the emergency. The fastest and most effective way of getting unemployment down right now is for the federal government to (i) buy lots of things from the companies that produce them, (ii) tax the surplus savings of the extremely wealthy and deliver the bumper revenue crop to people who will actually spend it on consumption or invest it in hiring people and producing something, and (iii) hire people directly.

    We could also try a true helicopter drop: a Congressionally mandated delivery of funds to the American people, backed by a straightforward central bank crediting of Treasury accounts, with no taxing or borrowing.

    Unemployment is a public policy choice. We could end it completely in a manner of weeks if we made the public choice to do it.

    If I thought the new NGDP/inflation targeting was likely only to have no effect whatsoever, I would say, “Sure, give it a try. What is there to lose?” But I am very skeptical about the standard textbook accounts of the inflation/unemployment tradeoff and the “inflation up/unemployment down” style of thinking. If the Fed only attempts to engineer higher inflation, and succeeds, I fear we will just get a lot of Americans paying higher prices for things, with no significant boost in employment or incomes, and with the cost savings windfalls going into the pockets of stockholders and execs.

  52. Nick Rowe writes:

    Dan: Break it down into 2 questions:

    1. What shifts the AD curve? (What will increase the demand for output: fiscal policy; monetary policy; or both?)

    2. What is the slope of the Short Run AS curve? (If the AD curve shifts right, and so demand for output increases, will the result be: higher output and employment; higher inflation; or a bit of both?)

    It’s the extreme classical view that says the SRAS curve is vertical, so that any increase in AD will only result in inflation, with no increase in output and employment. If they are right, then both fiscal and monetary policy are useless for reducing unemployment.

  53. Dan Kervick writes:

    Nick,

    Hopefully I will not get tripped up by curve illiteracy. I tend to think in those causal “billiard ball” you don’t like, rather than in terms of curves and equations. I think the world of people and their complex institutions is better captured by the former kind of model, not the latter kind of law-driven models familiar from subjects like thermodynamics or classical mechanics. I learned several of the curves in my college intermediate macro and micro classes once upon a time, and a few since then. But I have forgotten most of what I learned. When I form mental images of the effects of economic decisions, I don’t tend to picture curves beginning to move through mathematical spaces, I picture human beings sitting in offices, stores and work sites beginning to move and act in ways they weren’t before. I just try to keep track of as many of the moving parts as I can hold in my mind at one time.

    So anyway, it seems to me that if you transfer surplus wealth from those who tend to save a very high proportion of what they have to those people who are much more likely to spend it on something, and spend it very quickly, then you are going to increase aggregate demand substantially. It might be true that you are only transferring purchasing power from one location to another, but effective demand is not just determined by purchasing power, but by how that power interacts with and is liberated by the spending desires in its environment. If I transfer a case of beer from my pantry to my son’s frat house, the beer will begin to move out of it’s bottles much more quickly. If I move a balloon from a location of high pressure to lower pressure, it will expand and possibly even explode. If I move money from the bank account of Daddy Warbucks into the bank account of Susie the struggling Mom, my guess is that the money gets up and moves out into the rest of the economy much faster.

    Also, the government has at least the potential to increase the demand for goods and services suddenly and dramatically by placing direct orders for goods and services, and by directly providing jobs and monetary income for people who are strongly disposed to run to a store and place such orders themselves should they come into more income. And the government can do this without directly drawing any purchasing power out of the economy at all, either in the form of taxes or borrowings.

    The government might indirectly subtract substantial purchasing power when it does this if it causes prices to rise too sharply by bidding them up with its additional orders. But whether this happens or not, and in what degree, would seem to depend on where the government places its orders. If the government attempts to buy things from enterprises that are already running at close to full capacity, their orders will only compete with existing orders for a limited supply, and will drive up prices without increasing effective demand. But if they place orders with enterprises that are running well below capacity, and which have the ability to hire up our armies of unemployed workers fairly quickly, and bring existing capacity and supplies of capital goods back on line into production, then it seems to be we get a strong net increase in demand.

    I guess the government could always do much the same thing in the financial markets instead of the real economy. But that strikes me as a very indirect an inefficient approach. Financial assets are just instruments. They are just tools for moving some form of wealth from one place to another, including moving other financial tools. Yes, people behave differently with the monetary tools they possess, which pay no interest and have no future maturities, than they do with other kinds of financial tools. But the tools only work in the presence of some kind of material on which they can do their work. In the present environment, giving a bunch of financial services people some dollars in exchange for their bonds and securities, and expecting the dollars to start moving rapidly, seems like giving a bunch of idle construction workers some new shovels in exchange for some of their old wheelbarrows, and expecting them to start digging a bunch of home foundations.

    If these folks in the financial sector suddenly have more money to spend, maybe they will get busy trying to exchange it for promises of stuff, including promises of more money in the future. But it seems to me that the market that supplies attractive, high quality promises is pretty dry right now. And that’s because the people in the non-financial part of the economy just don’t have enough stuff on which to base credible promises. If there were a lot of good promises to buy, wouldn’t the people in the promise-buying business already be buying them? As I understand it they are basically permitted to invent the virtual money they need to buy the promise right on the spot, and then go buy the real money they need to fill part of the virtual hole, either from other banks or the central bank, at an extremely low rate.

    Now I guess the NGDP/inflation expectations approach is to let the construction workers know that the shovels you just gave them are special fast-rusting shovels that are going to lose their usefulness so rapidly that they better get busy digging. Use ‘em or lose ‘em. So the question is how likely the construction workers are to believe the representations of the shovel-maker. One likely response seems to be, “This guy just distributed a bunch of these shovels last year, and the year before. They were reputed to be of the fast-rusting variety. He certainly wanted us to believe they were of the fast-rusting variety. Some politicians were even running around panicking about the coming scourge of the hyper-rusting shovels! But you know what? I just hung onto my shovel, and I still have it. And its almost as good as new. So I don’t think I believe this guy’s story about his ability to make unusually fast-rusting shovels. I’m just going to hang this shovel on a peg on the wall along with all the other shovels, and use it when I have a really good opportunity.”

    I tend to view economic things in very crude and simple terms these days. There are lots and lots of people who have very strong needs and desires to buy the things that are readily available for sale. They want to fix their cars; paint their houses; patch up their driveways; buy new snowthrowers and lawnmowers and washing machines and dryers; buy their kids more clothes; toys and gadgets; put more food in their refrigerators; go to more movies and ball games; put more gas in their cars and drive around a bit; buy more books; and invite more people over for dinner. Yet many of these people have incomes and obligations that keep their ability to make these purchases way below the level they would like them to be. They are chomping at the bit to buy stuff; but though the consumption spirit is willing the income flesh is weak.

    These people are also in effect renting much of their lives from the people who actually own big parts of their lives. They don’t actually own the places they do their work, the machines they work with or the houses they live in. The owners of these things are often so rich already that they have exhausted their own desires to purchase the things that are readily available for sale, and are content to place their savings in vehicles that are designed to do little more but protect them against inflation by collecting rent from everyone else, rent charged for the increasingly meager satisfactions of living and working in the world the owners own. Some of those rents are even collected by buying claims on the future taxes to be paid by the people they own.

    So it’s seems to be that the simple conclusion is that some few people have way more wealth than they need and are disposed to use, and many, many other people have a lot less money than they need and are disposed to use. This is gumming things up. We should stick our hands into the economic engine, get them dirty, and move the wealth around by hand.

  54. winterspeak writes:

    JKH: LOL! There is no progress to be made with Nick ; )

    The labored Chuck Norris story just boils down to “it will work because it works”. There needs to be some internet law that says “if you have to assert something by making analogies to Chuck Norris, then you have no transmission mechanism and need to learn some basic accounting.” We can call it Nick’s Law.

    What’s funny about this is that Nick is so low on the academic totem pole (no offense Nick, but 201st position is not high, and ties Carlton with U Maryland [go Terps!] which is a fine institution, but not top or top-middle tier) that he has much more to gain from breaking with the bogus orthodoxy, getting comfortable with t-tables, and blowing up the whole rotten enterprise in a blaze of arithmetic. But instead he opts for Plan B, which is getting Scott Sumner to notice him, so maybe Brad DeLong will notice him, so maybe maybe Paul Krugman will notice him.

    Krugman is the big game here for everyone.

    I don’t think MMT can claim a single academic convert. Not even SRW (although he’s still looking for a job I think, and therefore should stay well away from accurate accounting).

  55. Nick Rowe writes:

    Dan: OK. But sometimes we want to increase demand, and other times we need to decrease demand. If we use transfers as the way to stabilise demand, sometimes we would want to transfer from savers to spenders, and other times from spenders to savers.

    But maybe we should continue this discussion another time. I seem to be upsetting some people.

  56. Dan Kervick writes:

    Well, you’re not upsetting me Nick. I enjoy your blog very much.

  57. JKH writes:

    Not upsetting me either, Nick.

    I think the MM/MMT interface and comparison of their respective approaches is quite interesting.

    Steve alluded to that in his post as well.

  58. winterspeak writes:

    Nick: Not upsetting me either, although I may be upsetting you.

    I don’t think there is any MMT/MM interface, contra SRW.

    I see MM as being an extension of current establishment macroeconomics with all the problems of accuracy and efficacy that brings. I don’t see it as being a fringe movement.

    If Peter K and others think that a NGDP target will make the Fed focus on economy more than they are right now that’s fine. I think it’s nuts as the economy already has the Fed’s full focus. They just cannot do anything about it.

    At the heart of all of this is monetary impotence, with MMT understands full well, and MM tries to dodge (and therefore stay within establishment dogma) by putting on a chuck norris t-shirt.

    chuck norris does not need to put on a chuck norris t-shirt. chuck norris IS a chuck norris t-shirt.

    I guess Rowe got tired of calling it the tinkerbell effect.

    MMT is absolutely a fringe movement, and far outside the establishment. The battle here is for the academy, and I see no reason why the Copernicans need to give an inch to the Ptolemists.

  59. JKH writes:

    Winterspeak,

    LOL

    It’s all clear to me now

    You are Chuck Norris

  60. Fed Up writes:

    JKH @5 said: “The moral case reverberates from the expectation of a superior long-run stabilization result, with lower volatility.”

    For that, try an all “currency” economy with no debt so that the amount of medium of exchange can’t go down from debt defaults and debt repayments.

    JKH @6 said: “Government deficit spending increases private sector net financial assets (initially cash) and equity (saving).”

    Is that with a bond attached or not? If it is, it seems to me you get:

    savings of the rich = dissavings of the gov’t (preferably with debt) + dissavings of the lower and middle class (preferably with debt)

    When the lower and middle class stopped going into debt to the rich and some tried to default, the rich (including the foreign rich) got the gov’t to go into debt for them and stopped as many defaults as they could with gov’t debt.

    If it is without a bond attached, I’d rather see the currency printing entity spun off from the gov’t and have it run the “currency” deficit, not the gov’t.

    Joe Smith @7 said: “Increasing nominal gdp does no one any good if it does not increase real gdp.”

    JKH @11 said: “Does NGDP targeting imply “embedded inflation targeting” as a function of RGDP?

    E.g.

    Today’s environment: RGDP at 1 per cent (say) means an implied inflation target of 4 per cent, and a “true” monetary easing mode.”

    Probably not everything that happens but:

    Let’s assume productivity growth of +2% or more. Now employment falls. Those unemployed people don’t spend and/or default on debt (or they could run down some savings and then do that). Next, the amount of medium of exchange (specifically demand deposits) is likely to fall. Now the savers may spend less and hoard medium of exchange (currency and other things like FDIC insured assets) to avoid losses including stocks. RGDP now falls. Employment falls some more, and companies start removing capacity. Wages are now flat to negative. Price inflation is above 5%. The negative real earnings growth causes more spending and/or debt default problems. Basically, as the amount of medium of exchange falls because of the debt defaults, RGDP starts “spiraling” backwards in time.

    TC @15 said: “Mosler thinks we could have much higher RGDP, so I propose a ratcheting rule for RGDP inside the TC rule. But that makes it so complex.”

    Two things. Just because real AS expands does not mean people can afford the extra output and does not mean people want to buy the extra output.

  61. Fed Up writes:

    IMO, both NGDP targeting and price inflation targeting suffer the same flaw, both ignore debt levels. Specifically, as long as debt (both private and gov’t) isn’t causing price inflation (and wage inflation too) then there is nothing to worry about. It seems to me if more and more debt is not producing price inflation (and/or being used to prevent price deflation), there is an imbalance building up somewhere.

  62. Fed Up writes:

    “In constrast to an inflation-targeting central bank, an NGDP-targeting central bank need not distort the division of income between capital and labor.”

    I don’t see that at all. As long as the central bank can put negative real earnings growth on the workers and trick them into debt, that is what they will do using price inflation and the 1970’s as some excuse. I already see someone going on about not the 1970’s again.

    “I don’t mean to claim that the Fed has caused the collapse of labor share: globalization, automation, and deunionization would have put pressure on wages regardless of Fed action.”

    Did they encourage congress with promises of lower interest rates and preventing the 1970’s again?

    “Managers, union leaders, and policymakers know that bargains whose effect would be to increase labor share might provoke contractionary monetary policy and even recession.”

    Then why doesn’t banker pay, central banker pay, economist pay, ceo pay, and politician pay lead to contractionary monetary policy and even recession?

  63. Fed Up writes:

    “An NGDP-targeting Fed could be a better Fed, in a moral as well as technocratic sense. I wish the market monetarists luck in trying to make it so.”

    I don’t. I believe they will make things worse because all they seem to be worried about is giving the rich more and somehow they will start investing.

    The first chance I get I’m going to call my rep and say if you support this (NGDP targeting and/or asset purchases beyond bonds garbage), not only will I not vote for you, I will actively campaign against you.

  64. Scott Fullwiler writes:

    Winterspeak @58

    Perfect.

  65. JKH writes:

    Scott @ 64

    Yes. For the purpose, that one was a cut above.

  66. [...] [...]

  67. [...] – Steve Randy Waldman: The moral case for NGDP targeting [...]

  68. Fed Up writes:

    TC @38 said: “In understanding modern money, Wray makes the point that this buffer stock of excess labor is used to keep prices in check, and this is both immoral and not very effective in promoting growth.”

    Is it “effective” (used loosely) if the lower and middle class can be “tricked” into debt and the economy remains supply constrained? Plus, some people have told me the “buffer stock of excess labor is used to keep prices in check” is actually the definition of capitalism.

    winterspeak @43 said: “wh10: Not to pick on Nick, but monetarists have a difficult time understanding inflation in general, and the 60s/70s in particular.

    There was an oil shock then, and higher prices in an energy input are going to be felt through everything.”

    And there is where the whole problem starts. The idea that prices go up, wages don’t (no wage-price spiral), but spending should not go down so some other means is used to maintain spending. Most of the time that would be more debt. Negative real earnings growth on the workers and more debt means no price inflation and no recessions in their 1970’s world. Eventually, that means too much debt.

    Dan Kervick @45 said: “The unemployed will probably feel a similar pinch. And some – but not all – of the people proposing NGDP level targeting have suggested that decreasing real wages is actually part of their purpose. They want to try decrease unemployment by helping businesses lower wages: …”

    Actually, low real wages and even low nominal wages is why we are in the economic situation we are in. Lowering them further is not the solution.

    And, “Don’t you think that there is something very indirect and gimmicky about attempting to boost income and employment by prodding people, through the crude and doubtful social engineering of expectations by central bankers, to (hopefully) spend a bit more more money because they are expecting rising inflation? Why do so many economic policy professionals limit us to these Rube Goldberg tricks? It looks like pure hidebound ideology to me.”

    Poor economic assumptions like the amount of stuff people want to buy has no limits.

  69. Fed Up writes:

    winterspeak @54 said: “The labored Chuck Norris story just boils down to “it will work because it works”.”

    It seems to me the “chuck Norris” story boils to if the fed overpays for assets that whoever sells the assets to the fed will stop saving and/or some entity will issue new bonds/loans or issue new stock to spend (some kind of tobin q), especially from the corporation/supply side. IMO, that neglects the idea that corporations have a cheaper funding option than bonds and stocks they are not using and why they are not using it.

    winterspeak @58 said: “I see MM as being an extension of current establishment macroeconomics with all the problems of accuracy and efficacy that brings.”

    I see MM as being an extension of trickle down economics. Spoil the rich ceo’s, rich bankers, and rich economists and add having the fed overpay for stocks means no economic problems. Here is where they want to end up.

    http://www.ritholtz.com/blog/2011/10/who-is-getting-richer-who-is-not/

    “That the rich get richer and the poor get poorer. At least, that is what most people believe.

    That cliché is not quite accurate. The data on this subject, as detailed by the CBO and reflected in the charts below, reveals that over the past three decades, the poor got a little bit richer, the rich got a lot richer, and the most rich got phenomenally richer.

    That may not fit on a bumper sticker, but it is the simple fact.”

    I say add about 1% to 2% to price inflation and see what the first chart looks like.

    And, “And as we showed the other day (see Forget the top 1% — Look at the top 0.1% and PPT presentation), the income inequality was skewed to an even greater degree amongst that top 1% — the top 0.1% and the much wealthier 0.01% is where all the big bucks are.

    This matters a great deal — but not for the silly political reasons you have been led to think. No, its not about class warfare. No, its not about redistributing the wealth.

    The reason this matters is quite simple: Healthy societies have modest, but not extreme wealth and income inequalities. There are inequalities because not everyone has the same skills and capabilities, and some inequality in wealth and income provides an incentive system.

    However, massive, widely disparate economic inequality has historically led to bad — and in some cases, extremely bad — outcomes. It contributes to social unrest, excessive political populism, and mob violence.

    I write this as someone who, due to a fortuitous combination of luck and work, developed a skill set that is highly valued by modern society. This is in part to an accident of birth, to have an excellent education, to some serendipity. Overcoming some adversity didn’t hurt; figuring out how to turn some deficits to an advantage was hugely beneficial. Thus, I find myself in that top 1% economically; but I know deep down in my soul that if I was born 100 years earlier — and maybe even 30 years earlier — I would not have been. This makes me acutely aware of the risks and dangers of our current wide disparity of wealth and income.

    Healthy societies allow their citizens to have a realistic chance at fulfilling their potential. This is done through a combination of economic freedom, enforcement of laws and contracts, legitimate democratic elections, basic education for its citizens, tax fairness, regulatory oversight of influential corporations an other entities, and the institutional value of protecting individual liberty.

    Where is the United States falling short?”

    Real earnings growth for the lower and middle class.

    Also, I’d change “healthy societies” to “healthy societies AND HEALTHY ECONOMIES”

  70. Yancey Ward writes:

    We can pretend such powers won’t be misused, but pretending is all we would be doing

  71. [...] the previous post suggests, I support targeting an NGDP path. I think an NGDP path target is superior in nearly every [...]

  72. Ian Lippert writes:

    If the problem is that the system is saturated with debt won’t the threat of inflating away people’s savings fail because they already have no savings left or the debt overhang means that there is no profitable investments and therefor no demand for taking on more debt? Austrian theory is about more than just letting businesses be liquidated, it’s about the lack of capital formation due to all kind of policies that the government uses simply to pull demand forward out of current savings (future consumption. Eventually all these policies will fail which I think includes NGDP targetting.

  73. [...] interfluidity Tweet [...]