Expectations can be frustrated

As the previous post suggests, I support targeting an NGDP path. I think an NGDP path target is superior in nearly every respect to an inflation target, and so would represent a clear improvement over current practice. [1]

But, unlike the “market monetarists”, I do not believe that central banks can sustainably track their target, whether NGDP or inflation, given the set of tools currently at their disposal. If those tools are (misguidedly) expanded to permit central banks to lend more freely or purchase a wider range of debt instruments, “success” might prove counterproductive. Although Scott Sumner and Bill Woolsey and Matt Rognlie hate the idea, I think we need to add direct-to-household “helicopter drops” to our menu of instruments. Ultimately, I have a different theory of depressions than the market monetarists do.

Self-fulfilling expectations lie at the heart of the market monetarist theory. A depression occurs when people come to believe that income will be scarce relative to prior expectations and debts. They nervously scale back expenditures and hoard cash, fulfilling their expectations of income scarcity. However, if everybody could suddenly be made to believe that income would be plentiful, everyone would spend freely and fulfill the expectations of plenty. The world is a much more pleasant place under the second set of expectations than the first. And to switch between the two scenarios, all that is required is persuasion. The market-monetarist central bank is nothing more than a great persuader: when “shocks happen”, it persuades us all to maintain our optimism about the path of nominal income. As long as we all keep the faith, our faith will be rewarded. This is not a religion, but a Nash equilibrium.

If the market monetarists’ theory of depressions is correct, then their position is correct. They are famously vague and prickly on the question of what instruments or “concrete steps” central banks will use to achieve their objective. That is because it doesn’t matter one bit, as long as those instruments are persuasive. Whether police wield pistols or tanks or tear gas or nightsticks to keep the peace really doesn’t matter, as long as their choice is sufficiently intimidating that people are deterred from resisting their authority. We only care about the weapon they’ve chosen when deterrence has failed and they are forced to act. Then we are faced with damage from the violence required to sustain their credibility. Even then, if we are certain they will restore order quickly and that incidents of disorder will be rare, we might not worry so much over means. But if conditions are such that lawlessness will not be deterred, there will be no general peace but frequent mêlées on the streets, then it matters very much how the police fight their battles. We start to ask whether the medicine is better than the side effects, whether police tactics are well tailored to improve the underlying conditions and restore a durable peace.

I have a Minsky/Mankiw theory of depressions. The economy is divided into two kinds of people, spenders and savers. Perhaps some people lack impulse control and have bad character, while others are patient and provident. Perhaps structural inequality renders some people hungry but cash-constrained, while others have income in excess of satiable consumption. Let’s put those questions aside and just posit two different and reasonably stable groups of people. Variation in aggregate expenditure is due mostly to changes in the behavior of the spenders. Savers spend at a relatively constant rate and save the rest. Spenders spend whatever they can earn or borrow, which varies with the level of wages, the cost of servicing debt they’ve accrued in the past, and the availability of new credit.

In this world, a central bank that targets something — NGDP, inflation, whatever — doesn’t regulate behavior via expectations. Instead, the central bank regulates access to credit and wages. When the economy is “overheating”, the central bank raises interest rates to increase debt servicing costs, tightens credit standards to diminish new borrowing, and if absolutely necessary squeezes so hard that a recession reduces spenders’ wages via unemployment. When the economy is below potential, the central bank reduces interest rates and relaxes credit standards, encouraging spenders to borrow and leaving them with higher wages net of interest payments.

This is a pretty good gig, it works pretty well, especially when the marginal dollar of expenditure is borrowed and easily regulated by the central bank. But if there are lower bounds on interest rates and credit standards, the scheme is not indefinitely sustainable. Even when spenders hold consistent, reasonably optimistic expectations about the economy, it becomes continually more difficult to persuade them to maintain their level of spending. The cost of debt service grows as their indebtedness grows, reducing their ability to spend. New borrowing becomes more difficult as wages are dwarfed by liabilities. Individuals become more nervous that some blip in their complicated lives will leave them unable to meet their obligations. In order to hold expenditure constant, interest rates must fall, credit standards must loosen, the value of spenders’ one consumption good that survives as pledgeable collateral — their homes — must be made to rise. Stabilizing expenditure requires continual easing. Any sort of lower bound provokes a “Minsky moment”, as expenditures that can no longer be sustained unexpectedly contract, rendering maxed-out spenders unable to service their debts.

All of this is just a theory, but I think it fits the facts better than a theory that takes stable demand and depression as arbitrary “sunspot” equilibria, selected by expectations. If the demand-stable “great moderation” had been an equilibrium, one might expect parameters like interest rates and aggregate indebtedness to be stable or to mean-revert around their long-term values. They were not. Interest rates were in secular decline throughout the period, and the indebtedness of some households to others was consistently rising as a fraction of GDP. Credit standards declined.

If my theory is right, absent significant structural change, attempting to restore demand merely by shocking expectations would be like trying to defibrillate a corpse. Yes, NGDP expectations absolutely did collapse over the course of 2008, but that was not due to a transient shock but a secular change which made the prior stabilization regime untenable. The housing collapse and credit crisis made it impossible to sustain expenditure by loosening credit standards. That left interest rates as the only tool by which to encourage spenders, but the zero nominal bound and rising credit spreads rendered that lever insufficient. Since 2008, whenever expectations have begun to perk up — and they have, several times — yet another “shock” has come along and returned us to pessimism (“OMG, Europe!”). Eventually you have to wonder whether there isn’t something more than arbitrary about these negative expectations.

The market monetarists might retort that a sufficiently determined central bank, if given license to lend and purchase assets as it sees fit, can always meet a nominal spending target, and therefore can always set expectations of nominal demand. That may be true. But in the context of an economy structurally resistant to increasing expenditure, expectations of stable nominal income become equivalent to expectations of continual central bank expansion. NGDP expectations can be maintained, if and only if the central bank demonstrates its willingness to continually intervene.

If intervention will be frequent and chronic, precisely what instruments the central bank intends to use becomes a matter of great public concern, rather than a technocratic detail best left to professionals. Central banks may significantly shape patterns of consumption and investment by choosing to whom they are willing to lend and on what terms. They may pick winners and losers, not for a brief Paul Volcker Chuck Norris moment but for the indefinite future.

So, I am all for targeting an NGDP path. I think it’s a great idea, and have more nice things to say about it. I hope the market monetarists are right, that merely by announcing an NGDP target and showing resolve in a one-time wrestling match with skeptics, central banks can restore a high-demand equilibrium. But if we adopt an NGDP target and are serious about it, there is significant risk that we will be committing to chronic intervention. The market monetarists owe us a more serious conversation than they’ve offered so far about how monetary policy would be conducted if resetting expectations turns out not to be enough. Would the interventions they propose be fair, if pursued cumulatively over many years? Would they be wise? Would they help resolve the structural problems that have rendered it so difficult to sustain demand, or would they exacerbate those problems?


[1] Yes, the US Federal Reserve has its murky triple mandate. But in practice tracking a tacit inflation target seems to dominate. Other central banks are at least explicit in their poor choice of a target.

Update History:

  • 29-Oct-2011, 7:10 p.m. EDT: Changed “a more durable peace” to “a durable peace”. “there is a significant risk” to “there is significant risk”.
 
 

43 Responses to “Expectations can be frustrated”

  1. [...] interfluidity » Expectations can be frustrated [...]

  2. Ashwin writes:

    Excellent.

    The expectations argument is similar to hank Paulson’s bazooka and as you said, the equilibrium of both is in the bazooka being fired with increasing frequency and ammo.

  3. Ritwik writes:

    Outstanding.

    Nick Rowe says in his last Chuck Norris post that ultimately, Chuck Norris just needs some stamina.

    But like you say, repeated central bank actions with a widened mandate are not distributively neutral.

  4. [...] Steve Waldman, aka Interfluidity, has a sort of critique of market monetarism: Self-fulfilling expectations lie at the heart of the market monetarist theory. A depression occurs when people come to believe that income will be scarce relative to prior expectations and debts. They nervously scale back expenditures and hoard cash, fulfilling their expectations of income scarcity. However, if everybody could suddenly be made to believe that income would be plentiful, everyone would spend freely and fulfill the expectations of plenty. The world is a much more pleasant place under the second set of expectations than the first. And to switch between the two scenarios, all that is required is persuasion. The market-monetarist central bank is nothing more than a great persuader: when “shocks happen”, it persuades us all to maintain our optimism about the path of nominal income. As long as we all keep the faith, our faith will be rewarded. This is not a religion, but a Nash equilibrium. [...]

  5. Peter K. writes:

    Great thought-provoking post. I agree the Fed needs to do more. Either set a higher inflation target or switch to targeting a NGDP path which would translate to the higher inflation target. Fiscal stimulus could help share the burden of stimulus; provide more bang for the buck and be more fair distributionally-speaking but it’s being blocked by the Senate.

    My theory is that the Fed would only have to act until we reached full employment. Having the Fed purchase toxic MBSs to shore up the banking system isn’t very fair distributional-wise, but once we reach full employment, wages should rise relatively speaking, as they did in the late 1990s. That would even the balance. The distributional effects are unfairly skewed at first but get better later. See Argentina.

    If the Fed hadn’t been spooked by 2.5 percent inflation in the Spring and kept their foot on the accelerator, we’d have catch up growth. What we have had instead is the Fed periodically intervening to keep deflation at bay.

  6. Yancey Ward writes:

    Your idea fails almost instantly at this point:

    However, if everybody could suddenly be made to believe that income would be plentiful, everyone would spend freely and fulfill the expectations of plenty.

    You don’t realize it, but you are making the exact same mistake the MMers and MMTers make consistently, and the same kind of error the Keynesians and the Monetarists have made that have left them utterly confused today. This kind of universal change in expectations isn’t possible, nor is it even controllable. Whatever system you erect, there are opportunities to game it, profit from it, etc (pick your own description). This arbitrage will ultimately undermine this attempt to control general incomes and expectations of future incomes which must ultimately be measured in actual goods and services, not dollar bills.

  7. Max writes:

    If expectations can’t be fulfilled except by increasingly unrealistic expectations, then you have a Ponzi economy. And if a central bank intervenes to support a Ponzi in an effort to meet a target, it will lose money. That is why super-QE is not a viable idea regardless of whose economic theory is more correct.

  8. Nick Rowe writes:

    Steve: good post. I will probably respond eventually (mid-term grading to do :-( ).

    What do you mean by central bank “interventions”? What, under your definition, counts as the central bank “doing nothing”? What is it holding constant when it “does nothing”, does not “intervene”?

    Ever see my old post on “The macroeconomics of doing nothing”?
    http://worthwhile.typepad.com/worthwhile_canadian_initi/2011/06/the-macroeconomics-of-doing-nothing.html

  9. Nick Rowe writes:

    BTW, suppose you convinced me that the natural rate of interest would go negative, and that an NGDP growth target of (say) 5% wouldn’t create enough inflation at potential output to keep the natural rate + inflation >0. OK, I would say, we need to raise the NGDP growth path from 5% to whatever you convinced me it needed.

    This is essentially the same as Paul Krugman’s argument that 2% inflation won’t be enough, because the natural rate may be minus 2%.

  10. JKH writes:

    The Market Monetarist NGDP targeting proposal incorporates:

    a) The choice of NGDP as a numerical target
    b) Reliance on expectations management
    c) The current zero bound environment as context
    d) Monetary policy rather than fiscal policy
    e) QE as the indicated monetary policy operation

    These orthogonal dimensions require unpacking. For example, versions of the proposal envisage QE (i.e. changes in excess reserves) as the transmission mechanism even in positive interest rate environments. This raises the question of how a monetary operation whose effectiveness at the zero bound is highly debatable can even be construed as the standard transmission mechanism at positive interest rate levels. That has not been the case historically – the level of excess reserves that has been required to set the Fed funds trading range has been tiny relative to the size of the banking system balance sheet to which the interest rate effect is transmitted.

    It is even more basic to distinguish between a) and d) above. For example, fiscal “helicopter drops” should be considered as an alternative transmission mechanism, given the choice of a).

    The proportionality of b) is a fundamental question. Minsky and expectations should be complementary, but with expectations as a back seat driver in the actual process of balance sheet adjustment.

    Returning to a), considered on its own merits, that is not a slam dunk. NGDP targeting embeds an interesting math relationship between inflation and real GDP, but a formal numerical target may be an albatross for policy purposes. The Bank of Canada implements a different type of target now, in the form of 2 per cent inflation. But it doesn’t adhere to the objective of hitting that target at every instant. There is an understood range of 1 to 3 per cent, which provides flexibility in responding to the RGDP environment.* The Fed might be better advised to consider NGDP trends as an indicator rather than a target when deciding on its actions.

    In order to be persuaded that expectations will be fulfilled, people must be persuaded that the monetary action implicit in the threat is an effective one. Conversely, if there is doubt about its effectiveness, expectations will be neutered. MM conflates communication effectiveness with expected operational effectiveness. Those are two different things. The hypnotizer can be confounded by the subject that doubts his ability to hypnotize. And many thinking people doubt the effectiveness of QE at the zero bound, not to mention it’s irrelevance above the zero bound. Not everybody subscribes to Scott Sumner’s construal of its success.

    There’s not a hope in hell that the Fed will ever adopt NGDP targeting, in any form. As a proposal, it will be judged as an undesirable and unstable numerical straight jacket around monetary policy flexibility, and relegated instead to a data point to be considered in formulating policy per se. Don’t expect the Fed to expect that it can control numerical NGDP expectations in the way envisioned by the MM’ers. Prerequisite to that assumption is the question of the effectiveness of actual monetary operations that supposedly constitute the “threat” behind expectations management, and QE (or “monetary base management”) is highly questionable in this regard. Finally, NGDP targeting provides no advantage to the Fed in terms of its current ability to communicate any monetary policy intentions or desired effects that it deems desirable to communicate.

    * This is worth listening to – former Canadian prime minister and finance minister Paul Martin, talking about inflation targeting, amongst other things (this past Thursday, 8 minutes):

    http://watch.bnn.ca/business-day/october-2011/business-day-october-27-2011/#clip557426

  11. [...] Can expectations be frustrated?, Interfluidity on NGDP targeting, and Scott Sumner’s [...]

  12. JKH writes:

    So the MM’ers are presently catapulting with glee over Christy Romer’s article in the Times. What Romer’s article conveniently ignores is that Volcker’s experiment in monetarism failed. He abandoned monetary targets because they were too rigid. Volcker succeeded because he raised interest rates, just like any other central banker. He was just way more shit-kicking aggressive about it than anyone imagined would be necessary. It had nothing to do with monetarism. But that sort of rigidity risk is exactly why NGDP targeting will never be implemented.

  13. Dan Kervick writes:

    Romer’s article is fairly disappointing – and sad. She repeats all of the standard talking points about confidence and expectations, and some of the textbook patter about inflation expectations, but is just as vague as everyone else about mechanisms.

    Frankly, I think the White House is just desperate, and has recruited the main Democratic economics pundits to take a flier on this new brand of snake oil. It’s the same business we had with QE. It’s not really the detailed economic guts of the policy that is attractive. They’re just hoping that some hyped announcement of a new “unconventional” policy will wake up the confidence fairy and generate some self-sustaining movement. Given the dysfunction of the legislature, they’ve got nothing left. They are also laying down a basis for a campaign scapegoat. If they say, “The Fed should do yada-yada”, whatever in the world yada-yada is, then they can try to blame everything that goes wrong on Bernanke.

    What’s sad these days is that every kind of significant economic policy change that would actually work is either politically impossible, ideologically forbidden, or blocked by some stakeholder in existing power arrangements. The culture of Washington, the media and the economics profession is absurdly conservative and committed to protecting established power and wealth, and to enforcing an obtuse code of laissez faire non-intervention in the real economy. So we’re down to begging Ben Bernanke to do a rain dance called “NGDP level targeting”, and hoping that boosts the tribe’s morale and gets them working harder in farming their crops.

  14. [...] – Steve Randy Waldman: Expectations can be frustrated [...]

  15. David Pearson writes:

    Romer explains how to set up an NGDP target:

    “The Fed would start from some normal year — like 2007″

    Right.

  16. vimothy writes:

    Assume the Fed is all powerful. Since the Fed is all powerful, rational individuals know that it always wins, and behave accordingly. Therefore, the Fed always wins. Therefore, the Fed need only decide an outcome for it to take place. The Fed always wins.

    To which the obvious answer is, yeah, but what if it doesn’t. Because if it doesn’t, the syllogism pulls apart. And where are we then? Well, probably we’re where we are now.

    That’s the thing about self-fulfilling prophecies: they’re self-fulfilling. If the outcome isn’t certain, then they won’t self-fulfill, by definition.

    In real life, people don’t have access to the Fed’s population-DSGE or what have you. We play it by ear. Consider, for contradiction, the case where the Fed really is all powerful. In that case, there is no Fed! But since there is a Fed, it follows that the Fed is not all powerful.

    Now, and obviously, arbitrage moves the repo/Fed funds market. So there is an element of self-fulfilling prophecy there. But only because the Fed has an instrument that can move that market. If the Fed announced another target, one that it could not control with simple OMO, interest rates on Mars, perhaps, or the number of blue Sedans produced in a year, then there would be no basis for the arbitrage to take place, given that the Fed does not set Martian monetary policy, or produce Sedans.

    In the true model of the economy, that is, “in real life”, there is a Fed, because it is not all powerful. And therefore, the management of expectations is more difficult than mere decision rule.

  17. Oliver writes:

    This is not a religion, but a Nash equilibrium.

    The difference?

    http://www.macrobusiness.com.au/2011/10/the-natural-chaos-of-markets/

  18. Ian Lippert writes:

    “the economics profession is absurdly conservative and committed to protecting established power and wealth, and to enforcing an obtuse code of laissez faire non-intervention in the real economy.”

    A few questions, first, why would economists want to protect established power and wealth? Admittedly their theories may inadvertently do this but I doubt it is their intention. Second, how can we call it laissez fair when we are discussing massive QE operations to increase the whole economy’s NGDP? I am interested in you clarifying a bit, I really liked your post.

  19. Peter K. writes:

    Kervick:

    ““The Fed should do yada-yada”, whatever in the world yada-yada is, then they can try to blame everything that goes wrong on Bernanke.”

    It’s a silly argument. Most American’s don’t know what the Fed does or who Bernanke is. Most have been brainwashed that inflation is bad. You’ve been brainwashed too it seems.

    I was skeptical of NGDP level targeting at first, but the weak, ad hoc arguments of critics help persuade me it’s worth a try. The real tangible effect is the Fed buying stuff. It’s not merely a rain dance. That’s like the conservative arguement that the government can’t effect the real economy via deficit spending. That it’s hocus pocus. Deficit spending hurts the children! It’s a bunch of rhetorical dishonesty and red herrings stuff the Internet is chock full of.

    No one is arguing fiscal stimulus wouldn’t be better. No one, so to bring it up is besides the point.

  20. Dan Kervick writes:

    Ian Lippert, you’re right to point out that the approach I am considering is not pure laissez faire. But for the past several decades we have been crucified on the cross of monetarism: a variety of approaches that all seem to agree on the core doctrine that the public sector should avoid participating in the real economy of non-financial goods and services, and that the government should limit its role to the financial portion of the economy, though the manipulation of monetary aggregates and interest rates, all administered through an “independent” central bank that is shielded from direct democratic accountability. So it’s not laissez les banqes faire. But it is laissez les everything else faire.

    This despite the fact that every new epicycle of monetarism during the monetarist era has been refuted in practice, so the monetarists keep having to dream up new targets to resuscitate their failed paradigm.

    The best we get in this stodgy, conservative era is some New Consensus wrinkles that spice up monetarism with the allowance than maybe the public through their government should also be allowed to “stimulate” the economy every once and awhile. Just a little prod, mind you, until the private sector gets back on its feet again. The dangerous idea that the public should be allowed to play any sustained role as a customer for, or producer of, goods and services, and an employer of material and human resources is considered verboten.

    So here we have a democratic public, in possession of a huge treasury and a rule of law, with unsurpassed power to tax, borrow and spend – and even to employ its role as the monopoly producer of the national currency to create additional money to pursue public purposes.

    And here before us lies a broken economy peopled by it’s own fellow citizens, with double-digit unemployment, tremendous levels of household debt and insecurity, stagnating economic production and vitality, and all run by an oligopoly of creditors determined above to make sure they get all their money back.

    And yet this democratic public is paralyzed by ideology: an ideology that has taught them to believe that they themselves – the public sector – are uniquely incompetent and bungling as a customer for goods and services, and uniquely unsuited and inappropriate as a producer of goods and services. So with a world of opportunity to do good lying right before us, and with incredibly powerful tools available to make those opportunities realities, the hectoring ministers of the economic church have bound our hands and minds with shame, guilt and a great “Thou shalt not!” hanging over everything. Maybe we just need to be made to crawl more on our bare knees on the flagstones until we have purged our souls of any lingering socialistic impulses.

    As to why economists are so committed to defending the dominant institutional order of power and wealth, I can’t say for sure. Maybe it has something to do with who pays their salaries, and funded the research and researchers who provided their educations and ideological formation.

  21. Dan Kervick writes:

    The real tangible effect is the Fed buying stuff. It’s not merely a rain dance.

    OK, Peter K, what stuff exactly? Maybe if the MMers and their new New Keynesian allies would commit to some actual tools and propose some concrete transmission mechanisms, we could evaluate the likely effects. But they are always dodging and shifting on that score, and prefer to retreat to the clouds of the broad Fed “commitment”.

    And here’s what I want to know: Is the goal to create higher inflation or isn’t it? The liberals like Krugman, DeLong, Yglesias and Romer are at least willing to say (sometimes) that is their goal, and I believe some of them have even said that driving real wages down is part of the prescription. The MMers? They seem divided among themselves, and present no unified account of the purpose of the policy change.

    My general view is that the policy elite in the United States is convinced that Americans are overpaid, and that our wages need to be pushed down further, via inflation if necessary, so that overpaid and profit-soaked private sector corporate barons can be induced to hire more of us, graciously, at the price they prefer. If that’s not their aim, then I want to hear in clear, non-euphemistic terms what the actual aim is. And if that is their aim, then my answer to the policy elite is, “Screw you. Americans’ household incomes have already taken a pounding from outrageous upward redistribution of wealth, sustained unemployment and inflation that is really already quite a bit worse than the biased statistical indices show. Until you guys get on the right side of the fight, and start doing right by your less privileged fellow-citizens, I am going to keep trying to throw monkey wrenches into these calls for the further hosing of American workers.”

  22. Lord writes:

    No, the goal is not more inflation but more growth, and it is unlikely to result in much inflation with so many idle resources, but if it results in more inflation that is not entirely bad as it allows the accommodation of fixed prices and liquidation of debt. When is inflation not inflation? When money is provided to pay for it. That is why I like the money drop. The Fed currently works by raising asset values. This is a form of trickle down but under current circumstances requires extraordinary intervention to accomplish which the Fed has no credibility in doing.

  23. Doc Merlin writes:

    @Lord:

    We are already at 4% inflation, and rising.
    This is because idle resources are idle due to microeconomic reasons.

  24. Dan Kervick writes:

    No, the goal is not more inflation but more growth

    And what is the mechanism for producing that growth, Lord?

  25. JKH writes:

    Krugman argues that NGDP targeting is an intellectual deception, and destined to fail as a concept.

    But it’ll work in a way that’s parallel to Volcker’s success against inflation.

    “NGDP is arguably mainly a relatively palatable way to state a strategy that’s ultimately about something else … a more acceptable way to justify huge quantitative easing and a de facto higher inflation target … Don’t call it a deception, call it a communications strategy.

    http://krugman.blogs.nytimes.com/2011/10/30/a-volcker-moment-indeed-slightly-wonkish/

    But QE itself has always been his second choice after fiscal – instead of doing nothing – given the political roadblock to fiscal. But he doesn’t really believe in QE per se.

  26. JKH writes:

    There are a few people chipping away at the technocratic truth of the matter. See comments by ‘K’ and Matt Rognlie here. (And mine later on):

    http://www.themoneyillusion.com/?p=11586

  27. Lord writes:

    Growth comes from growth. We are growing, just not by enough. Higher food prices will increase agricultural production and exports. Higher oil prices will fuel investment in production. Higher commodity prices will induce increased resource production. A lower dollar will decrease imports and increase exports as a shift in the terms of trade move production here as is already underway. A reduction in expected debt will increase spending. We have reduced our debt by 1% more than expected, but we can do more. The constraint we face is our laziness. Wages do better under inflation than disinflation. While this sounds like all inflation, there is increase in real production, and inflation is not inflation if given the money to pay for it. That is the real advantage of the money drop. Whatever increase in prices it generates is paid for by it.

  28. winterspeak writes:

    is a “direct to household helicopter drop” mean fiscal policy in the form of the MMT payroll tax holiday?

  29. JKH writes:

    WS,

    IMO, you can view it as any targeted reduction in taxes paid by households or any increase in transfer payments to households. So the payroll tax holiday would qualify on that basis.

    At the same time, the term seems to presume central bank intermediation – via currency or reserves – as opposed to bonds. The value of that condition is debatable.

    But it’s fiscal.

    The “classic” example seems to be showering currency down on people, whether that’s interpreted as a transfer payment or a tax expenditure.

    The helicopter terminology is silly, distracting, and unhelpful – because there’s always debate about what it means when you get to the detail.

  30. Vinz Klortho writes:

    Increasing aggregate demand to purchase “things” in an economy running at less than full capacity, either more borrowing by consumers (ie cars, houses, ocean cruises, toys) is needed, or consumers need more income that they can spend directly.

    I’m a saver, so I’m not going to be spending any more than necessary, unless my income increases, which it is not despite working for a very profitable, growing company in a recession resistant industry. As a matter of fact, I’m “unspending” by paying for college costs for my kids directly out of cash flow, rather than borrowing, and that decreases my other spending, by a lot.

    Immediate elimination of FICA/Medicare withholding would give me 7.63% more income, 15.3% if the employers share is given to me as well. Pay for it with $250B platinum coins passed directly from the Treasury to the FED, I don’t want to hear about increased, unsustainable debt.

    This would increase my spending, guaranteed. Otherwise, not so much.

    Vinz

  31. winterspeak writes:

    JKH:

    Sorry — meant to ask SRW that explicitly to see what his definition was.

    Fiscal policy is the last refuge of monetarists.

  32. Greg writes:

    Dan @21

    I felt like cheering at the end of reading that

    Thanks

  33. [...] thoughtful critique of macroeconomic management by the monetary [...]

  34. Dan Kervick writes:

    YW, Greg.

  35. Greg writes:

    What this whole NGDP targeting seems to be, is a “GDP Standard”. They are substituting national output for gold. They are promising X amount of our national output per dollar, and they wish to keep it constant, much like a gold standard guarantees x amount of gold per dollar.

    Now, in theory that is not bad thing at all. The MMT crowd has argued all along that the only value of our currency is our production. There should be no promise of any commodity in exchange for the dollar, only a promise to “get in the show”. So we have to keep our show the best. It appears to me though that this plan will have nothing to say about the quality of the show but simply the price of it.

  36. JKH writes:
  37. Leverage writes:

    What happens when crude oil is over 200$ per barrel? It’s game over, as simply as that, the beginning of the collapse.

    You keep playing with fire and you get burnt eventually, and the more money you ‘pore’ into the system and to the finance establishment (don’t fool yourself, this is where the money will end and GS knows it) the stronger commodities will raise wrecking havoc and the economies.

    Can you understand money is not wealth? If you shrink the asset classes you can invest in because the central bank owns all of them and you have left is money and you are forced to ‘invest’… where exactly? At the end in physical goods with inelastic demand. Because this does not increase income, neither productivity nor demand per se, in fact, just like stupid QE policies it will shrink margins and effective expendable income of the families, misery index to the sky folks and will end up being inflationary.

    I will start to believe in what gold bugs say and wait for hyperinflation if this stupidity continues from politicians, bankers or academics. Get a clue out of your ivory towers please, people can’t stand it anylonger!

  38. Fed Up writes:

    It seems to me the “market monetarists” are just another version of spoil the rich, trickle down, supply side economics.

    “Self-fulfilling expectations lie at the heart of the market monetarist theory. A depression occurs when people come to believe that income will be scarce relative to prior expectations and debts.”

    I’d say it is not about expectations. The “depression” occurs when some people’s assumptions/beliefs are SHATTERED by the reality that income will be scarce relative to prior expectations and debts.

    “As the previous post suggests, I support targeting an NGDP path. I think an NGDP path target is superior in nearly every respect to an inflation target, and so would represent a clear improvement over current practice.”

    What about your “more equity” version? Isn’t that more important?

    “Perhaps structural inequality renders some people hungry but cash-constrained, while others have income in excess of satiable consumption. Let’s put those questions aside and just posit two different and reasonably stable groups of people. Variation in aggregate expenditure is due mostly to changes in the behavior of the spenders. Savers spend at a relatively constant rate and save the rest. Spenders spend whatever they can earn or borrow, which varies with the level of wages, the cost of servicing debt they’ve accrued in the past, and the availability of new credit.”

    That sounds to me like you are trying to violate economists’ most precious assumption, real aggregate demand is unlimited.

    “All of this is just a theory, but I think it fits the facts better than a theory that takes stable demand and depression as arbitrary “sunspot” equilibria, selected by expectations. If the demand-stable “great moderation” had been an equilibrium, one might expect parameters like interest rates and aggregate indebtedness to be stable or to mean-revert around their long-term values. They were not. Interest rates were in secular decline throughout the period, and the indebtedness of some households to others was consistently rising as a fraction of GDP. Credit standards declined.”

    I agree that is a better explanation. I think you need to also work the amount of medium of exchange into your model. Lastly, if more and more debt is not producing price inflation or is being used to prevent price deflation, is there an imbalance in “someone’s” budget building up somewhere?

  39. a3047656 writes:

    I’ve said that least 3047656 times. The problem this like that is they are just too compilcated for the average bird, if you know what I mean

  40. Fed Up writes:

    From JKH’s link: “The problem with her argument is that as the story of the hapless businessman, and studies such as this one, illustrate, Mr Volcker’s policy did not succeed by changing people’s expectations of inflation. It succeeded by crushing demand. As unemployment moved up the Phillips Curve, inflation plummeted. Only then did inflation expectations stabilize at a lower level.”

    Right, it is about reality.

    And, “My colleague makes an even more extreme argument: that the recession could have been avoided altogether had the Fed pursued an NGDP target. He argues that recessions could only occur because of real shocks, by which I assume he means supply-side shocks.

    This is simply not compatible with theory or evidence. Even if expectations of nominal GDP had remained steady, actual NGDP would not: expectations simply aren’t powerful enough. There is no monetary policy the Fed could have pursued in the face of the collapse in housing prices in 2008 and ensuing financial panic that would have kept nominal or real GDP on track.”

    IMO, depressions are caused by true, positive aggregate supply shocks that are not handled correctly from a medium of exchange standpoint. The problem is usually in the past.

    And, “An NGDP target has some advantages over an inflation target, especially in responding to supply side shocks.”

    It seems to me that both NGDP targeting and price inflation targeting both have the disadvantage of ignoring the amount of debt.

    And, “There is, of course, one rather unseemly advantage to NGDP targeting, that Paul Krugman alludes to here: it is a surreptitious way of temporarily raising the inflation target without the toxic politics of doing so explicitly.”

    Is it possible that higher price inflation could make things worse?

    And, “One should normally be wary of a monetary policy that achieves its objectives through subterfuge, but desperate times call for desperate measures.”

    Is monetary policy and subterfuge about trying to trick the lower and middle class to take on more debt?

  41. Fed Up writes:

    For JKH or anyone else:

    If for every borrower there is a lender in the “strictest” sense, then how does the amount of medium of exchange increase?

  42. [...] take in order to hit an NGDP target.  In particular, the recent conversation between Scott Sumner, Steve Waldman, and Nick Rowe has raised questions such [...]

  43. Michael Chini writes:

    Insanity. I hope you guys actually get the hyperinflation you desire if only to serve as the means for humanity to rid itself of your ilk for *good*.

    MY LORD…stop the madness (no I’m no Austrian either).