Because the stakes are so small?

People I admire were calling each other nasty names last week, so I cowered in the corner, put my hands to my ears, and hummed very loudly. I’m talking about the debate over money and banking that involved Steve Keen (1, 2, 3, 4, 5), Paul Krugman (1, 2, 3, 4, 5, 6, 7), Nick Rowe (1, 2, 3), Scott Fullwiler, and Randy Wray among others. Here are some summaries by Edward Harrison, John Carney, and Unlearning Economics. Anyway, although there were some good moments, this debate just made me unhappy. The mechanics of banking are straightforward and uncontroversial, although they are widely misunderstood. [1] Yes, some misunderstandings were expressed and then glossed over rather than acknowledged when corrected. But that is to be expected in a very public conversation in which people are not behaving cordially, but are instead playing “gotcha” with one another. When a conversation is framed with one group calling the other mystics and the other shouting “Ptolemy!”, that is not a good sign.

I don’t mean this as criticism of anybody. Humans have egos, and I’ve certainly behaved worse. But it is terribly frustrating to me. The protagonists in this debate have much more in common than they have apart, and I think some progress could be made intellectually, and perhaps in the governance of the real world, if they’d communicate with an eye toward finding where they agree. Though I get in trouble for saying so, I think that the heterodox post-Keynesians, mainstream saltwater economists, and uncategorizable market monetarists actually agree on a lot. I think they unnecessarily pick fights with one another for reasons that are more sociological than intellectual. I don’t mean to pretend that they don’t have important theoretical differences. They do. They will probably never agree on what sort of policy would be “optimal”. But if we move the goal posts from perfection to better-than-the-status-quo, they’d find a lot of room to join forces. I do my best to understand all of their models, and as imperfectly as I may have done so, I think I’ve learned from them all.

I’m going to switch gears a bit from the banking debate and talk about the fault lines over “fiscal” vs “monetary” policy, however you wish to define those words. We have identifiable groups of thinkers who agree on the most fundamental question — should the state act to stabilize “aggregate demand”? — but who have strong preferences over whether macro policy should be implemented via fiscal or monetary channels. If we frame this as a binary choice, all we have is a fight. But if we realize that we live in a “mixed economy” and are likely to do so for the foreseeable future, there is lots of room for conversation.

  • Market monetarists make excellent points about how cumbersome and unsuitable a legislature is to the task of managing high-frequency macro policy. They point out that fiscal interventions may have limited or even paradoxical effect if they are offset with countermoves or diminished activism by the central bank. They emphasize the nimbleness of monetary operations, their inexhaustibility and fast reversibility, and how those characteristics combine to make central banks extremely credible expectation-setters. They suggest that we rely upon consistent rule-oriented monetary policy, and argue that this can be implemented more by anchoring expectations (which become self-fulfilling) than by direct market intervention.

  • Mainstream saltwater economists are accustomed to operationalizing monetary policy as interest-rate policy, and pay great attention to the zero lower bound on nominal interest rates. They point out that regardless of your theories of central bank “ammunition”, as a matter of practice or politics, expansionary monetary policy seems to become difficult once the zero lower bound of conventional interest rate management has been hit. They suggest we rely upon monetary policy in “ordinary” times, but that we supplement it with fiscal policy at the zero bound. Conventional “neoclassical synthesis” models did not do a great job of foreseeing or predicting the crisis, but they have done a good job of explaining and predicting macro behavior during the crisis, in the context of “depression economics” or a “liquidity trap”.

  • Post-Keynesians did predict a crisis, on broadly the terms that we actually experienced. They argue that there are adverse side effects to using monetary policy to manage aggregate demand. Although in theory this might be avoidable, post-Keynesians point out that in practice monetary stabilization, even above the zero bound, seems to engender increasing indebtedness and financial fragility, and to distort activity towards overspecialization in finance and real estate. They pay much more attention to the details of financing arrangements than the other schools, and emphasize that vertiginous collapses of aggregate demand are nearly always accompanied by malfunctions in these arrangements. Aggregate demand, post-Keynesians argue, cannot be managed without concrete attention to the operation of financial institutions and the conditions that lead to their fragility. Post-Keynesians make the deep and underappreciated point that fiscal policy, even if it is conventionally tax-financed, can deleverage the private sector and reduce financial fragility in a way that monetary operations cannot. Monetary operations, if you follow the cash flows, amount to debt finance of the private sector by the public sector. The central bank advances funds today, in exchange for diverting precommitted streams of future cash from private sector entities to the central bank. Fiscal expansion is more like equity finance of the private sector by the public sector. Public funds are advanced, and captured by parties with weak balance sheets as well as strong. But taxes are not withdrawn on a fixed schedule. They are recouped “countercyclically”, in good times, when private sector agents are most capable of paying them without financial distress. Further, the private sector’s tax liability is distributed according to ex post cash flows realized by individuals and firms, while debt obligations are distributed according to ex ante hopes, expectations, and errors. So tax-financed fiscal policy acts as a kind of balance-sheet insurance. Both by virtue of timing and distribution, taxation is less likely than monetary-policy induced debt service to provoke disruptive insolvency in the private sector. Plus, during a depression, fiscal expansions may never need to be offset by increased taxation. [2] Never-to-be-taxed-back fiscal expenditures, if they are not inflationary, shore up weak private-sector balance sheets without putting even a dent into the financial position of the strong. They represent a free lunch both in real and financial terms.

When I think about these three groups, I don’t think, HIghlander-style, “There can be only one!”. I think “Cool! Let’s put these ideas together.”

The market monetarists are right. Having different agencies conduct fiscal and monetary policy without coordinating or setting expectations is a bad idea, it invites inconsistent and ineffective policy. If we can, as the market monetarists suggest, overcome the status quo inadequacy of monetary stabilization with more aggressive policy or by inventing better tools — new techniques for expectation setting, targeting NGDP futures, negative IOR, etc. — we should do those things! [3] But, the mainstream saltwater types may be right too. Monetary policy at the zero bound seems difficult to do in practice, even if it need not be in theory. So, to avoid having the central bank and fiscal policymakers work at cross-purposes, we can give the central bank fiscal levers it can use as part of its overall policy regime. Some post-Keynesians and market monetarists seem to like the idea of using payroll taxes as a fiscal lever (albeit with different rationales). The monetarist Scott Sumner has endorsed a proposal to use sales-tax surcharges and rebates as a supplement to monetary policy. We might find common ground even on more ambitious fiscal policy ideas, provided they are implemented in an expectations-consistent, rule-oriented way and integrated with monetary policy, rather than reliant upon ad hoc moves by a legislature in real-time. (We may have a harder time finding common ground on the MMT job guarantee, but once we get talking to one another on friendlier terms, who knows?)

There are lots of issues and controversies, but they strike me as far from insurmountable. A lot of people (like me!) distrust status quo central banks. I think central banks tilt the economic scales in favor of rentiers in general and financial industry cronies in particular. But central-bank cronyism is a governance issue. No one is particularly attached to the current governance structure of, say, the US Federal Reserve, which keeps the public and elected officials at a remove but gives the financial industry great influence (via formal ownership and enfranchisement but also via operational interdependence and “dependency corruption“, ht Matt Yglesias). It’s not just the leftish post-Keynesians who are upset about how central banks behave. Market monetarists like Scott Sumner and saltwater Keynesians like Paul Krugman constantly lament the bureaucratic caution of the real-world Fed, when the economic theory advanced by the guy who runs the place demands flamboyant commitment in order to anchor expectations. If there is a correct policy, if the managers of the central bank are competent and understand the correct policy, but it is politically or institutionally impossible to implement the correct policy, then we do not have an “independent central bank”. We have a governance problem that we should remedy. [4]

One nice thing about a monetarist / saltwater / post-Keynesian synthesis, the thing that has me most excited, is that it would be perfectly possible to give our nouveau central bank a mandate that explicitly includes restraint of private-sector leverage in addition to an NGDP target. I think that the post-Keynesians are right to identify financial fragility as a first-order macro concern. On its own, NGDP path targeting would help “mop up” after financial fragility and collapse, because it weds depressions to inflations, engineering wealth transfers from creditors to debtors when things go wrong. But we’d rather avoid the whole cycle of fragility, insolvency, and inflation, if we can. Monetarist David Beckworth has pointed out that stimulative monetary policy need not expand bank-mediated imbalances between creditors and debtors. Proper expectations could encourage creditors to spend (and, implicitly, debtors to save), reducing overall indebtedness. That could happen! But it has not been our experience with expansionary monetary policy in the recent past. Over the Great Moderation, wealth inequality and the indebtedness continually expanded while interest rates were pushed towards zero in order to sustain the pace of debt-funded expenditure. Under an NGDP-targeting regime, however, Beckworth’s view might be vindicated. NGDP-targeting would dramatically increase the vulnerability of creditors to inflation compared to the status quo price-stability commitment. Creditors might become less willing to accumulate large stocks of fixed-income assets, especially as indebtedness and perceived financial instability grows, for fear that a “Minsky moment” will require a path-targeting central bank to engineer a burst of inflation. In my view, nothing has distorted financial market behavior more egregiously than taking inflation risk off the table, which has guaranteed real rents to default-free debt holders, financed if necessary by the taxation of workers and the nonconsumption of the unemployed. Restoring inflation risk to its proper place (a bad economy means crappy real returns even to fixed-coupon debt) may be enough to shift private sector incentives and prevent unwanted accumulations of financial leverage. The market monetarists could be right, full stop.

But the post-Keynesians might be right that treating financial fragility as an afterthought is never sufficient, that the dynamics of endogenous instability identified by Minsky will not be thwarted by vague fears of inflation among creditors. If macro policy were to include a leverage cap as well as an NGDP path target, and if the central bank were empowered with a broadly targeted fiscal instrument, an unwelcome expansion in private sector leverage could be opposed with a shift towards tighter money but looser fiscal. This would reduce the pace of new borrowing, and accelerate repayment of existing private-sector debt, shifting creditors’ claims from fragile private-sector balance sheets to an expanded public sector debt stock. The NGDP path (with the occasional inflations it imposes) and the leverage cap (with the occasional deficits it engenders) would combine to shape the budget constraint faced by the political branches of government. Loose bank regulation would be paid for with automatic fiscal outflows to constrain leverage rather than via occasional crises and bailouts. The cost of borrowing would be related to the level of aggregate leverage and the government’s consolidated fiscal stance, and would be set reactively rather than actively by the central bank to maintain the NGDP path subject to an aggregate leverage constraint.

Maybe this is a terrible idea. I’m intrigued, but I’m kind of an idiot. The rest of you are very nice and smart and reasonable. You should talk with one another and stop picking fights over how many straw men can dance on the head of a DSGE model. Please.


[1] As Henry Ford famously noted, “It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.”

[2] Many post-Keynesians would object to the phrase “tax-financed” as an incoherent descriptor for any government expenditure. But the claim that government expenditures sometimes need never be offset with tax increases is perfectly orthodox, when the cost of interest service is below the long-term growth rate of the economy, or when the present value of incremental growth in tax receipts engendered by the spending (under existing law) exceeds the cost of servicing the debt. Depressions are a time when government paper is sought after by the private sector, driving real debt service costs towards or below zero. If there are unutilized resources in the economy that would have generated no tax revenues absent government expenditure, or that would have elicited real transfers — negative tax revenues — via unemployment or other transfer payments, the incremental growth in real tax revenues engendered by government investment of fallow resources may be large, even if the investment is inefficient. In ordinary times, government expenditures do not “pay for themselves”, but in a depression, they very well might. Note there is no substantive symmetry here with “dynamic scoring” of tax cuts. In a depression, the private sector is leaving resources unutilized, foregoing potential consumption and investment in order to acquire government paper. Cutting taxes only generates incremental tax revenue if the distribution of tax cuts is to people who will invest by putting unutilized resources to work rather than bid-up the price of resources already in use or expand their holdings government paper. That’s a hard kind of tax cut to engineer. In good times, tax cuts may generate some incremental revenues by substituting efficient private-sector resource use for less efficient public-sector use and by sharpening incentives for private-sector production. But incremental revenue will be modest, as we’ve merely replaced a less efficient use with a more efficient use rather than bringing an entirely unutilized resource into service. And the cost of financing the tax cuts that generate this incremental revenue will be burdensome, as real interest rates are high and positive when the economy is booming. It is unlikely that tax cuts ever “pay for themselves”, but expenditures can when the economy is in depression. None of this conflicts with the market monetarists’ view that fiscal policy is unhelpful because depressions can be avoided with sensible monetary policy. If they are right that monetary policy is enough, then there never need to be unpleasant depressions where fiscal policy pays for itself because of inefficient nonutilization of resources by the private sector.

[3] There is some unconventional monetary policy to which we absolutely should object, “credit easing” targeted towards particular institutions or sectors, which is a form of directed subsidy. Fortunately, the market monetarists agree that this is a bad idea.

[4] Perhaps there is less of a tension between technocratic competence and democratic accountability than we once imagined.

Update History:

  • 9-Apr-2012, 12:25 a.m. EDT: Fixed broken link in Footnote #3; “future cash from the private sector entities to the central bank”
  • 9-Apr-2012, 3:10 a.m. EDT: Adopted consistent (non)hyphenation of “zero lower bound”.
  • 11-Apr-2012, 2:30 a.m. EDT: Fixed broken link to Tcherneva job guarantee paper.
 
 

65 Responses to “Because the stakes are so small?”

  1. [...] No time to comment on his new post, however I never get depressed reading Steve Waldman.  But I do strongly disagree with this: I’m [...]

  2. Ramanan writes:

    “I think that the heterodox post-Keynesians, mainstream saltwater economists, and uncategorizable market monetarists actually agree on a lot. I think they unnecessarily pick fights with one another for reasons that are more sociological than intellectual.”

    Surely you’re joking Mr Waldman!

    I can’t even think of anything under the sun on which there is such a disagreement.

    And IMO, there’s disagreement on each and every issue at least between Post Keynesians and the rest.

  3. Brito writes:

    Why no mention of Austrians? I’m not an Austrian myself in the lest, I just think it’s interesting you left them out when they’re also so prominent in the blogosphere.

  4. Marko writes:

    The debate between PK and Keen about the workings of finance was overdone , because it centered on the issues of reserve/deposit constraints to lending rather than the more important issue of growing economy-wide leverage , in the U.S. and most other advanced economies.

    Credit flows stimulate economic activity. To the extent that such credit flows raise leverage levels ( measured as debt/gdp or debt/income ) that economic activity is being borrowed from the future , as leverage can’t increase without limit , and the payback comes during the deleveraging cycle. Thus , to properly guage the performance of an economy , you’d need to see how it does while holding constant some sustainable level of leverage. Keen and PK would still probably disagree on this point , because PK is still stuck in the “one man’s debt is another man’s asset” mindset , even with the recent example of Japan , and now , a whole bunch of other examples , staring him in the face. Keen was way , way out front on this.

    Nobody , and I mean nobody on the right will ever accept this entirely , because it would require a re-write of the past several decades of rightwing economic research. Correcting economic growth statistics since 1980 by assuming constant leverage would probably knock off .5-1.0% of annual gdp growth throughout the period ( the credit impulse , or “accelerator” per Keen , would by necessity have to fluctuate around zero , rather than having the positive bias afforded by rising leverage ). There’s no need to correct for the several decades prior to 1980 , as economy-wide leverage was relatively constant then. With this new realization , suddenly it becomes clear that the onset of neoliberal economic policies was a disaster , globally , contrary to all the studies in support of it during the interim , which at best showed equivalent performance to earlier policies , and then only if the studies were done by its supporters.

    The NGDP-targeting scam of Sumner and others is an attempt to avoid the holocaust ( for rightwingers and the corporate elite ) of a return to FDR/New Deal/Keynes-type policy prescriptions , as this new look at the data would clearly suggest. Targeting NGDP is a delaying tactic , designed to allow further upward transfers of incomes – and what little wealth remains – from the working class , for as long as possible.

    Listening to the NGDP crowd on economic policy is like listening to Exxon on climate-change policy. It distracts you , slows you down , and prevents you from implementing a proper solution. And , like the climate-change deniers , they’ll probably succeed. It’s clear that most economists on the left won’t put up much of a fight. The Sumner love-fest appears to be bipartisan. OWS could be a different story , however , so hope is not entirely lost.

  5. Brito writes:

    Comments like that by Marko is why I find it immensely distrustful to trust the Post-Keyensian crowd, their tone and demeanour are similar to Austrians in their intense amount of rhetoric, value judgements and generally cultish style behaviour, it immediately sends alarm bells in my head: “warning, idealogical crank alert”, call it a heuristic or an instinct, but it’s a heuristic that has served me well and has stopped me getting swamped up in idealogical schools of thought that eventually crumble. I mean seriously, I think targeting NGDP is a flawed concept, but claiming that it’s “designed to allow further upward transfers of incomes – and what little wealth remains – from the working class , for as long as possible” is quite possibly the most pathetically obnoxious hyperbole I have /ever/ encountered, which is so clearly written in the baddest of all possible bad faiths, with no hint at even an attempt to develop a nuanced analysis of the motivations behind those sort of beliefs.

  6. Brito writes:

    Immensely difficult*

  7. Marko writes:

    “written in the baddest of all possible bad faiths, with no hint at even an attempt to develop a nuanced analysis of the motivations behind those sort of beliefs.”

    When you’ve watched the neoliberal shell game and experienced its impact for forty years , as I have , you’d be a damn fool to accept more of it being shoved in your face – while pausing to conduct a “nuanced analysis”.

    The neoliberal emperor has no clothes. The Asians know it , Latin Americans know it. If Americans and Europeans don’t know it yet , they either haven’t been paying attention , or they’ve been paid to not know.

  8. Dan Kervick writes:

    They emphasize the nimbleness of monetary operations, their inexhaustibility and fast reversibility, and how those characteristics combine to make central banks extremely credible expectation-setters.

    My mongrel terrier Rico is quite nimble and inexhaustible, SRW, and capable of fast reversals of direction, but that does not make him a credible expectations setter. He also has no ability to significantly boost aggregate demand, production and employment.

    I think we have some fundamental disagreement here about the capacities of the central bank. You say,

    The mechanics of banking are straightforward and uncontroversial, although they are widely misunderstood.

    This is close to the heart of the matter. A Lot of the post-Keynesian crowd seem to agree in thinking that there is pervasive ignorance among the mainstream – saltwater and freshwater alike – about the nature of central bank operations and the behavior of commercial banks, and that as a result mainstream economists are prone to attribute bizarrely exaggerated stimulative powers to the central bank that have no grounding in reality. So it’s not just a matter of people basically agreeing about everything important, with some minor quibbles about details.

    Suppose a government creates some money and spends it into the real economy somehow. It seems to me that it makes a huge difference whether the money goes directly to actual producers and consumers who then it use it to finance additional production and consumption, or whether it is used to replace some bank’s government-issued bonds with shorter term government-issued bonds (i.e. dollars) which will then just sit in commercial bank reserve accounts having negligible impact on bank behavior. That’s what the debate is all about. People aren’t just debating which of two equally effective channels to use to accomplish the same stimulative effect, with only some fussing about which channel is more nimble and which one is more ponderous. Its a debate about a choice between one channel that can actually accomplish the job and one that can’t even come close to accomplishing the job.

    I will state the claim baldly: the central bank cannot achieve full employment. It doesn’t matter what alleged “mandate” some well-meaning but ignorant legislature might have assigned to that bank. It is the height of irrationality and government incompetence to assign a mandate to an agency to accomplish a task which falls well outside the scope of its institutional powers.

    Some people do form elaborate sets of expectations based on their interpretations of central bank actions and statements. But these expectations are sometimes based on crude misunderstandings of the role of the central bank and the nature of its operations. (Think back on the near panic by some allegedly well-informed people about the the QE programs and the “hyperinflation”.)

    Since I’m inclined to think this country needs a major reorientation of its approach toward employment, public investment and economic growth and development, then passionate, sometimes heated disagreements among economists do not depress me. They make me think we’re finally getting somewhere in breaking the ice jam of a debilitating mainstream consensus. The change won’t come by just splitting the difference among the stakeholders in failed paradigms.

  9. Brito writes:

    Dan Kervick

    “Some people do form elaborate sets of expectations based on their interpretations of central bank actions and statements. But these expectations are sometimes based on crude misunderstandings of the role of the central bank and the nature of its operations. (Think back on the near panic by some allegedly well-informed people about the the QE programs and the “hyperinflation”.)”

    This is the second time I’ve seen you say this, and it is an extremely, very very contentious claim, you really need to prove this empirically. I think again you’re confusing the vocal bloggers with actual investor community, who are at institutions that have existed since before any ‘post-Keynesian’ was born, and have had much time to observe and interact with the central bank, these movements are not from hyperinflation nutters; they’re because changes in the risk free rate and exchange rates can drastically alter portfolio valuations.

  10. wh10 writes:

    Brito, fair points, but did you hear about Bill Gross’s expectation that govt bond auctions would fail after QE2 ended (or if we don’t take him literally, we can assume he meant interest rates would spike)? Perhaps that’s not the kind of expectations you are talking about, but if people like Bill Gross, who have worked at those types of institutions that have existed since before any ‘post-Keynesian’ was born (not sure why there are quotes- PK is an established school in econ), possess such severely flawed understandings of our monetary system, I am sure it’s quite pervasive.

  11. Brito writes:

    Actually despite what everyone was saying, it appears that Bill Gross temporarily had a pessimistic view on US bonds because of debt ceiling debates not coming to a resolution; the idea of US insolvency under a fiat regime is new issue not really seen before compared to central bank policy (I mean sure people have been worried about debt before whilst the US completely left the gold standard, but nothing like this), so I’m not surprised even people like Bill Gross will be unsure what to make of it. On the other hand, Bill Gross, as important as he is, is not the market, and it turns out the market in general disagreed with him.

    Also, I put post-Keynesian in quotes because I don’t like movements that call themselves ‘post-something’, it just sounds silly. I don’t like post-modernism, don’t like post-punk music, it’s just another quirk I have.

  12. [...] is more, and it is insightful throughout.  I would add two points, both in the skeptical [...]

  13. Dan Kervick writes:

    Brito, perhaps one of the ways in which we talk past each other on the matter of expectation is in the relative importance we assign to the responses of the investor community. I don’t see these investors as the real drivers of the economy, but as a group that, in the aggregate, passively responds to real economy changes by moving its ownership stakes from one set of assets to another, keeping a diversified portfolio all along. What they do can make a difference here and there to individual firms, but is not the source of significant macroeconomic changes. These are people who just manage money, which is always looking for a cash flow of additional money by buying ownership shares in the productive activity of others.

    My understanding is that firms already have large stores of savings, and are maintaining high profits due to cut costs. If they are not hiring, it’s not due to a shortage of capital. It is due to their beliefs about the absence of paying customers to buy any additional output they might decide to produce. If a company thinks they will make money by hiring people and producing more, they will do so and can do so. Marginal effects due to what Ben Bernanke says or doesn’t say are of miniscule significance, to the extent that firms are paying any attention at all.

    If households are not increasing their spending, it is primarily due to the fact that their real incomes are holding steady or declining, and that they expect those incomes to continue to hold steady and decline. They are not paying attention to Ben Bernanke. But they are paying attention to the fact that they haven’t received raises for four years while gas and other prices climb.

    What really matters are the beliefs and behavior of millions of households and businesses. Most of those people aren’t paying any attention to the Fed actions and pronouncements at all; and when they do pay attention their ability to interpret accurately those actions and pronouncements varies widely.

    Look at all the young people: massive unemployment in that age group and mountains of student debt. That’s a hugely important pool of consumers. You think they pay any attention to what Ben Bernanke is saying? If there is more inflation is that going to help them with their debt? No, because inflation only reduces a nominal debt burden when it corresponds to an increase in nominal income – which isn’t happening.

    So my view of the economy is very much “bottom-up”. That’s why I find all of the obsessions with Ben Bernanke and his pronouncements to be a distracting side-show. It’s a case of ivory tower academics and money managers not paying attention to where the real economy lives.

  14. merijnknibbe writes:

    @Brito,

    As a starter: the M-3 metric of money, without currency in circulation, decreased with 19% in february, ‘up’ from -17,5% in January. http://www.bankofgreece.gr/Pages/en/Statistics/monetary/monetary.aspx That’s what we are talking about, in Europe… And we know what Milton Friedman thought about such a situation: “SOLVE IT, YOU MORONS. THIS IS THE POST-GUTENBERG ERA! AND USE THOSE VERY HELICOPTERS THE GREEK ARMY HAD TO BUY FROM FRANCE AND GERMANY AND THE USA.” Comparable monetary disasters are happening in Italy, Ireland and Spain.

    – Some people seem to sense this. Read the speeches of Mario Draghi, head of the ECB, and read them really well: this man is des-pe-ra-te-ly trying to increase the pace of M-3 money growth in the Eurozone.

    – But his efforts are thwarted. Read the speeches of Jurgen Stark, former member of the board of the ECB who left the ECB to protest against monetary policy: he’s again and agains stating that an increase of the balance sheet of the ECB will lead to higher inflation in the medium run. It’s of course difficult for him to state that an increase in the amount of money will lead to inflation because (as until shortly in the USA) the M-3 metric of the amount of money is increasing way below target (yes, the ECB officially targets money growth, albeit with little succes). So, he has to take recourse to another variable to be able to panic. I don’t really understand why he does this. He left the building in Frankfurt. His point of view is supposed to be a crude misunderstanding by, well, by everybody outside Chicago. Inflation is going down in the Eurozone, unemployment is going up, money growth is at a historical low – but he (and not just he) is still warning about the dangers of inflation… And lots of people do take this serious. And it’s not just somebody like Stark who tries the thwart the efforts of Draghi. There is austerity all around and – contrary to the expectations of some but not to those of for instance Krugman – this does not lead to higher consumer confidence … but to lower consumer confidence. Even in Germany, where wages and jobs are increasing and unemployment is going down, retail sales seem to be falling from a cliff (look at the January and February data…).

    The point: expectations do matter, misunderstandings about the role and function and effectivity of Central Banking can be spotted up to the highest level and monetary and fiscal policy are at this moment in the Eurozone diametrally opposed… the worst fears of freshwater economists (liquidity traps, inconsistent policies) and market monetarists (disastrous self sustaining decreases of the amount of money) and post-Keynesians (disastrous, self sustaining increases of unemployment which lead to a lack of Schumpeterian investments in people and companies) are coming true. We are getting poorer now as well in the future – for no reason at all, except lack of coordination. Or to phrase it in your language: my (and your) (pension)savings will, in about twenty years or so, be worth much more with higher inflation but less depression than in a situation with lower inflation and more depression.

    By the way – I am teaching or have teached not only macro economics but also marketing,organization theory, accounting and the like. About your ‘ideological cranck alert’ remark: one of the differences between Post-Keynesians and the neoclassicals is that Post-Keynesian teaching is consistent with those subjects – while neo-classical economics are not (just look at subjects like consumer behaviour, loanable funds, money/debt creation or competitiveness and whatever). It’s not he Post-Keynesians who are the cranks, looking at this from the perspective of these subjects.

  15. Steve Roth writes:

    @Ramanan:

    All three groups think the inflation rate should be higher right now. I’d call that a pretty profound consensus.

  16. Steve Roth writes:

    @Marko: “( the credit impulse , or “accelerator” per Keen , would by necessity have to fluctuate around zero , rather than having the positive bias afforded by rising leverage ).”

    No, I think that it would be overall positive, because like government debt levels, private debt levels would generally increase with the size of the economy. But private debt is obviously much more volatile than government debt, which (along with its far larger magnitude) is what makes it so dangerous.

    But I agree that:

    1. leverage-adjusted growth analysis would probably show even more clearly than the existing data what a failure supply-side has been, both for the economy as a whole and particularly for 90%ers.

    2. NGDP level targeting, as a panacea obviating the need for or even possibility of sensible, automatic-stabilizer-based fiscal management, may well be a trojan horse or at least an effective multi-decade delaying tactic.

  17. Becky Hargrove writes:

    Dan Kervick,
    You need to think carefully before you set about breaking apart the efforts of so many to stabilize the monetary economy. Plus, bear in mind that people are fully aware that NGDP targeting is a solution for the short term, until longer term solutions can create more vital economies in the near future. Stop to consider that the wealth of knowledge and human skill is not the same kind of wealth as the physical resources which are so aptly represented by money. We have to get at the heart of these differences in wealth if we are to move forward together with true economic access for every member of humanity. If you would only give people a chance to do something extremely important now, the more profound shifts in economic thought and action might actually be possible. Don’t think that window of opportunity can stay open indefinitely, for it is already quite fragile.

  18. Ramanan writes:

    Steve (Roth),

    Inflation *should* be higher? Should ?

    Maybe Krugman says so … he probably has some mechanism in mind where the central bank creates an “inflation expectation” which is “anchored” higher and this leading to higher activity? How does the mechanism work??

  19. Steve Roth writes:

    @Ramanan:

    No, Krugman would like to see much more fiscal stimulus, putting unused/underutilized resources to work, pushing demand up towards potential supply…

    But again: they all think that if inflation were higher now (and had been in recent years) we’d be looking at a more prosperous future. They disagree on how to achieve that, and the mechanisms by which it would work (though I think they all agree on the hot-potato spending effect).

  20. Morgan Warstler writes:

    SW,

    I blame Sumner for you thinking this:

    “On its own, NGDP path targeting would help “mop up” after financial fragility and collapse, because it weds depressions to inflations, engineering wealth transfers from creditors to debtors when things go wrong. But we’d rather avoid the whole cycle of fragility, insolvency, and inflation, if we can. Monetarist David Beckworth has pointed out that stimulative monetary policy need not expand bank-mediated imbalances between creditors and debtors.”

    The reality is NGDPLT does far more on the top side of growth pissing on booms than it does after collapse.

    I argue Scott screws up by not getting into it more, but it terrifies liberals, so he downplays it.

    Under say 4.5% NGDPLT:

    1. Barney Frank and Fannie Freddie is actually impossible.

    2. In fact, basically any time the government tries to backstop bad credit risks (housing, student loans, etc), under Sumner’s approach, we see a burst on the NDGPLT trend line notch over trend, and BAM! the fed comes in and raises rates and keeps raising rates until literally the policy changes.

    3. Think of it as a yearly cap of 4.5% combined RGDP and inflation. Suddenly say an increase in public employee pay eats up the RGDP and adds to the inflation, and BAM! small business loans cost more, and Main Street riots. BUT instead, when things are going great at 4.5% pure RDGP and no inflation, and things start to go over trend, what can we do??? FIRE PUBLIC EMPLOYEES. Instantly we are back under trend, and the good times can keep rolling (this damper on the public sector is actually far more Keynesian than anyone on left admits).

    But, we can 100% SURE under 4.5% NGDPLT the financial crisis doesn’t happen, by 2004 the cap is being reached, and Main Street is not about to allow taxi drivers to go buy 4 houses.

  21. Becky Hargrove writes:

    Oh my Steve you sure opened a can of worms today. Hum louder!

  22. K writes:

    SRW: “Monetary policy at the zero bound seems difficult to do in practice, even if it need not be in theory.”

    Assuming full commitment, monetary policy is sub-optimal at the ZLB, *even in theory*. If you want “optimal” monetary policy, you could just get rid of hand-to-hand currency. That eliminates the ZLB, and the whole point of the Old-Keynesians. What would happen then, of course, is that with this new powerful monetary tool in hand, and the objections of the OKs dispensed with, the great dis-inflation would be securely back on track, as would the great leverage-up, trickle-up wealth transfer.

    “There is some unconventional monetary policy to which we absolutely should object, “credit easing” targeted towards particular institutions or sectors, which is a form of directed subsidy. Fortunately, the market monetarists agree that this is a bad idea.”

    The market monetarists generally seem to support equity market purchases as a last resort (Sumner included, in the link you provide). I fail to see how that’s not a “targeted subsidy” to large, rent-collecting organizations. To (only slightly mis-) quote Sumner: “the Fed buying up 1/2 of the houses in my neighbourhood (something I don’t recommend!) would do less harm than fiscal stimulus.” Seriously??? No, not seriously.

    I think you neglect a (admittedly smaller) schism between the traditional animal-spirits/Hicksian Old-Keynesians and the ratex, inter-temporal optimizing, market failure New-Keynesians. Because the reference framework of the Old Keynesians is ISLM, a model developed in a pre-financialized economy, they have an essentially monetarist, reserve multiplier view of macro dynamics. The New-Keynesians, like Woodford, following a finance/macro framework first laid out by Fischer Black, reject the relevance of the base, and are in that respect far closer to the Post-Keynesians. Both these groups have in common a really solid understanding of finance and banking.

    From what I can tell, the Post-Keynesians reject the NK model on the basis that it doesn’t capture the Minsky dynamic, and the PKs are too busy advocating important policy to wait for plodding micro-foundations to catch up. The New-Keynesians, unfortunately, are generally silent in the blogosphere (no, Mankiw and his blog don’t count). That’s too bad, because it seems to me that the way forward lies in merging the insights of the PKs with the careful, scientific approach of the NKs. As you say Steve, I think they have a lot more in common than they seem to recognize.

  23. [...] Randy Waldman has a good post on Interfluidity in which he attempts to form a synthesis between New Keynesians (NKs), [...]

  24. Dan Kervick writes:

    Bertrand Russell, in his classic article “On Denoting”, has a nice quip about the urge to synthesize:

    “… Yet if we enumerated the things that are bald, and then the things that are not bald, we should not find the present King of France in either list. Hegelians, who love a synthesis, will probably conclude that he wears a wig.

    Sometimes the synthetic, middle ground position is the least plausible of all of the theoretical alternatives.

  25. Ramanan writes:

    Steve (Roth),

    While it’s true that Krugman is arguing for more fiscal stimulus, he frequently invokes the “inflation expectations” arguments. That central bank create this. Independent of fiscal stimulus. So bit Bernankeish … With ideas such as creating an expectation would lead people to spend more etc … !! … As Joan Robinson said about neoclassical economists – they behave as if the future has already occured!

    The agreements are superficial – when you open a paper and see the utility maximising agent with exception ability to see the future and assumptions such as all agents know how the economy works, you will realize a fundamental difference!

  26. [...] Tyler Cowen, the very worthy Steve Randy Waldman discusses the Post-Keynesian argument for fiscal policy, even when we are not at the zero bound: [...]

  27. RueTheDay writes:

    Steve – Good post, but I wouldn’t be so quick to dismiss attacks on DSGE models. IMO, these models ARE the problem, because they represent a sort of mindblock that assumes away the problem and prevents forward progress.

    See my post entitled, “Microfoundations of the crisis”:

    http://www.disequilibria.com/blog/?p=213

  28. [...] sincerely hope that many leaders in the field will follow Waldman’s lead in finding some common ground that helps improve outcomes for us all.

  29. vjk writes:

    I agree with Ramanan (How does the mechanism work??)

    But again: they all think that if inflation were higher now (and had been in recent years) we’d be looking at a more prosperous future.

    By that logic alone, Zimbabwe must be in the economic paradise.

    Seriously, the inflation level can be regarded as a symptom (good ? bad ? depending on the economic context), not a “target”.

  30. Steve Roth writes:

    @vjk:

    “By that logic alone, Zimbabwe must be in the economic paradise.

    Seriously, the inflation level can be regarded as a symptom (good ? bad ? depending on the economic context), not a “target”.”

    I’m glad you felt the need to put “Seriously” at the beginning of the second line, to signal that the first line is specious. (So, why write it in the first place?)

    The inflation level can be regarded in many ways. But it cannot, for instance, be viewed as a transfer from debtors to creditors. QTC.

    All three of these schools agree about inflation in our current situation. You can disagree with that agreement, but that doesn’t change the fact that they agree.

    Or: that that agreement is directly at odds with the delusions of the neocon neoclass class.

  31. Ramanan writes:

    Vjk,

    “By that logic alone, Zimbabwe must be in the economic paradise.”

    :-)

    Steve Roth,

    I don’t think Post Keynesians say we need inflation to be higher or should be higher.

    As Vjk says, it’s a side effect or a spillover.

    Krugman/Bernanke and all may say we should have higher inflation. But this position is ridiculous – one can have inflation and no decrease in unemployment.

    As I said the agreements are superficial. There’s just a messed up causality lurking there and since I do not know neoclassicalE/NKE well, I can’t pinpoint.

    I suspect the argument is that the utility maximising agent who has a perfect forecast sees more inflation into the future and starts guzzling because this maximises his utility and this leads to bla bla bla …

    The agreements may just sound superficial. The aims can be similar. For, even Paul Krugman wants full employment and the Austrians think implementation of their theories can lead to a better society.

    But beyond that, there’s a world of difference.

    Two similar sounding opinions can have major differences if one looks at them closely.

  32. Nick Rowe writes:

    Steve:

    I think the MM/NK presumption of using monetary policy to target AD (either inflation, NGDP, or whatever) is also based on Tinbergenian reasoning. There aren’t enough instruments to leave one instrument (monetary policy) doing nothing. So we advocate:
    M: macro stuff. Get AD right.
    G: micro stuff like build the right number of schools and bridges etc.
    T: micro stuff like make sure the right cohort pays for the schools and bridges and minimise tax distortions. (Yes I have read Abba Lerner).

    If G and/or T are doing macro AD on top of doing all the micro stuff, then M is unemployed and G and/or T is overemployed.

  33. winterspeak writes:

    Please don’t refer to Paul Krugman as “PK”. That way madness lies.

    I would agree that post-keynesians don’t talk about inflation being higher or lower. It really is a spillover.

    Suppose we have an oil shock and gas is $20 a gallon. We’d see significant cost-push inflation, but unemployment would probably get worse.

    Sumner and Krugman would crank up rates, making unemployment worse still (or better — at least the private sector rentiers are getting interest income again).

    Post-Keynesians would set rates to zero (and leave them there) and print money via lower taxes or higher spending, spending on their politics. In a cost-push environment, your options are inflation with unemployment or without unemployment. The PK goal is to have people who want to work, working, with inflation and politically acceptable levels.

    The MM/NK world assumes a monetary mechanism and there is none. Which is why the end up resorting to tinkerbell/chuck norris arguments. It really is like saying both the phlogiston AND oxygen crowds make good points. Persuasive to those with a PhD in Alchemy, but the rest of us… not so much.

  34. Ramanan writes:

    Winter,

    “Post-Keynesians would set rates to zero (and leave them there)”

    Am not sure if Post-Keynesians would want to do that (as if .. it can be done!)

    A subgroup called MMTers want to do that.

  35. Truth Squad writes:

    Accusing others of being ideologically biased while holding you are not ideological biased and following some sort of ‘objective economics’ is a very very very old trick which anyone wise enough should be aware of.

    Economics is not ‘objective’ and has always (and still is) political in nature (it reflects individual and group interests and power relations between subsets of society to exercise control). This is not a conspiracy theory, is something someone with a bit of knowledge of history should know.

    The status quo manufacturing ‘consensus’ on economic theory and dominant ideology is not new, automatically calling anyone suspect because he moves out of the ‘consensus’ is neither something new. Rhetoric is not always so rhetorical, and giving other the burden of proof when the status quo has not proven nothing is what is really suspicious.

    Now, about contending theories and dancing a kumbaya: No, because what is wrong is wrong. Maybe a part of the theories have something right by accident, but building on wrong foundations is not the way to go, start with right foundations and if they drive you to similar conclusions then fine, but building ad hoc theories just to suit the egos of some economists is not very scientific (you are trying to make economics something is not: science; but if you try, hey, follow the scientific method at least).

  36. winterspeak writes:

    Ramaman:

    If you say so! PK vs MMT vs MMR is sort of like the Liberation Front of Judea vs the People’s Front of Judea vs the Judean People’s Front.

    Not so Krugman vs Sumner vs PK (contra Steve)

    I think you could set the FFR to zero. Not sure if it’s a good idea though.

  37. Detroit Dan writes:

    Well spoken Dan Kervick and Winterspeak. Thank you.

  38. Ramanan writes:

    Winterspeak,

    If you wish – doesn’t hurt being accurate though.

    Agree on MM/NK/SS/PRK (Paul Robin Krugman).

  39. Peter K. writes:

    Waldman:
    “One nice thing about a monetarist / saltwater / post-Keynesian synthesis, the thing that has me most excited, is that it would be perfectly possible to give our nouveau central bank a mandate that explicitly includes restraint of private-sector leverage in addition to an NGDP target.”

    Reminds me of the HBO show Game of Thrones where Renly Baratheon, Robb Stark and Stannis Baratheon would be wise to join forces to defeat the Lannisters and kick Joffrey off the throne. They should but will they?

    Stannis corresponds nicely to the PKs. The Iron Throne is his by right. The others’ claims are illegitimate (even if his brother Robert *took* the throne). He won’t compromise at all even if his military forces are tiny compared to the other belligerents. Plus he’s resentful and has huge chip on his shoulder.

    Kervick:
    “Since I’m inclined to think this country needs a major reorientation of its approach toward employment, public investment and economic growth and development, then passionate, sometimes heated disagreements among economists do not depress me. They make me think we’re finally getting somewhere in breaking the ice jam of a debilitating mainstream consensus. The change won’t come by just splitting the difference among the stakeholders in failed paradigms.”

    You’ve pushed me away from your position with your argumentative style and refusal to engage in quality dialogue. The differences I see are mainly political. PKers want a major reorientation and disparage anyone calling for more moderate steps to help ameliorate the situation right now, like full employment. To the PKers it matters *how* we get full employment. They assert that the mainstream consensus is debilitating. Well it sort of worked from WWII until the 21 century and the housing bubble. Even now the economy is growing albeit painfully slowly. They assert QE didn’t work. Prove it!

  40. Peter K. writes:

    winterspeak:

    “The PK goal is to have people who want to work, working, with inflation and politically acceptable levels.”

    As if Waldman, myself and others don’t want this.

  41. Marko writes:

    “They assert that the mainstream consensus is debilitating. Well it sort of worked from WWII until the 21 century and the housing bubble.”

    Huh?

    Are you really suggesting that the concensus was the same from WWII ’till now ?

    Check your history. The Miltie/Ronnie/Maggie three-way marked a rather radical departure from the then-prevailing concensus ( economic or political-economic ) , and not just in the U.S. and U.K. The impact was global.

    If you support that concensus now , at least own it in a legit manner. Don’t try to pretend that pre- and post-1980 are the same , with just minor tweaks here and there.

    It’s important for the record to be clear about this now , because as more and more Japan-like data rolls in over the next decade or so , the efforts to fuzz the distinction between those eras , and to re-write its economic history , will only grow more intense and sophisticated. Think Amity Schlaes x 100.

  42. Dan Kervick writes:

    Agree with Marko.

    If it weren’t for the monetarist and neoliberal takeover in the 80’s post-Keynesians and Old Keynesians would be having some amiable disagreement about the best way to spend.

  43. wh10 writes:

    Just had to say I loved this allusion “Liberation Front of Judea vs the People’s Front of Judea vs the Judean People’s Front.”

  44. wh10 writes:

    Also, f*cking Judean People’s Front.

  45. reason writes:

    Steve,
    I loved this post. Yes, yes, yes. Shame you don’t seem to have moved the main protagonists at all.

  46. reason writes:

    Just to put my oar in, I think the main thing I’ve won from this debate is that the desired policy mix that was in vogue from after the Volker disinflation (tight fiscal policy and loose monetary policy) is a big mistake. We should go EXACTLY the other way (looser fiscal policy and tight monetary policy). Ensure that total broad based private sector net wealth is growing, but not private sector (especially household sector) indebtedness.

  47. reason writes:

    vjk
    Ramanan

    Look the argument is not complicated. Real interest rates = nominal interest rates – inflation expectations.

    If nominal interest rates are at zero, the only way to lower real interest rates is to raise inflation expectations. You don’t need to create strawmen – this is all upfront.

  48. Peter K. writes:

    Marko and Kervick, okay so when Kervick writes that “Since I’m inclined to think this country needs a major reorientation of its approach toward employment, public investment and economic growth and development,” what he’s really saying is that he wants go back to the pre-80s regime. I think Krugman would agree with that goal as would I. Wouldn’t seem to be that “major” of a reorientation. If we could reform the Senate so conservatives couldn’t filibuster everything, we could get there.

    You guys are really, really hard to nail down. Again, it seems argumentative.

  49. casquettes new era…

    [...]interfluidity » Because the stakes are so small?[...]…

  50. Marko writes:

    “Wouldn’t seem to be that “major” of a reorientation. If we could reform the Senate so conservatives couldn’t filibuster everything, we could get there.”

    A return to the status quo ante that’s accompanied by a period of full employment , facilitated , let’s say , by Democrats getting their way re: fiscal expansion , would solve nothing. It’s can-kicking of a different sort – “compassionate can-kicking” , a politician might say.

    A plan to attack the current weak recovery that doesn’t also include a mechanism to dramatically restructure our economy is of no interest to people like me , because it offers no reason for hope about the future. When the fiscal stimulus runs out , as it must , eventually , we all turn around in 2014 , or 2016 , and find ourselves right back where we were in 2008 , 2010 , and 2012. Whoopee.

    The “reorientation” required is dramatic. How , with anything like the current crop of Democrats , do we get back to an economy where , when productivity grows at 2%/year , wages across all five income quintiles also grows at 2%/year , one where incomes rather than credit supports consumption ?
    How do we slash the finance sector to minimize its parasitism of economic output , with Democrats that gave us the likes of Glass-Steagal repeal , a crippled CFTC and , more recently , the JOBS Act ? Is a millionaire Democratic Congress any more likely to give us a truly progressive taxation system than a Republican millionaire Congress ? On NPR a few days ago , I heard Chris van Hollen , ranking (D) on the Budget Committee , “debating” a Republican counterpart on tax reform by stating : ” We want to make sure we at least maintain current levels of tax progressivity ” , or words to that effect. Whoopee , again.

    If Republicans were the only problem we might have a chance , but they aren’t , so we don’t.

    People on the street , people I don’t recognize , give me some hope. Especially the angry ones.

    People like Krugman , DeLong , Shiller – supposed “good guys” all – not so much , angry or not.

  51. Marko writes:

    Given that last line above , imagine my dismay just now upon discovering this :

    http://krugman.blogs.nytimes.com/2012/04/11/the-occupy-handbook/

    Two out of three , right there on the cover. They’re going to lobotomize all those heroic , angry , streetwalking strangers I was hopeful about.

    If DeLong is among the list of “46 others” , I may just have to shoot myself.

    I guess I should wait ’till I read it first , though. There’s some names on there that can tell a pretty good story , so on balance it might be OK.

  52. Dan Kervick writes:

    Peter K, we seem to be talking about two different things here. I’m fine with practical steps to ameliorate current problems without completely solving them. But I find passionate argument, debate and disagreement to be healthy, not depressing. The goal of debate should be the truth, not a happy hand-shaking compromise consensus among all the participants – especially one that won’t accomplish anything worthwhile.

    On the MM business, I know you’ve already heard my opinion so many times that you don’t need to hear it again.

  53. Brad DeLong writes:

    *Snicker*

  54. Marko writes:

    *Snicker*

    Bite me you fat fuck.

  55. [...] previous post advocating a collaborative detente between post-Keynesians, market monetarists, and mainstream [...]

  56. [...] Modern Monetary Theory (MMT), siding with Keen. Further discussion and commentary was provided by Steve Randy Waldman and Scott Sumner, and summaries by Edward Harrison, John Carney, Unlearning Economics, and Business [...]

  57. Ramanan writes:

    reason,

    “If nominal interest rates are at zero, the only way to lower real interest rates is to raise inflation expectations. You don’t need to create strawmen – this is all upfront.”

    But why? Why does someone need to create “inflation expectations”?

  58. Ramanan writes:

    Sorry should have rephrased. So what if real interest rates are lower? In one particular definition, real interest rate is negative in India. So?

  59. [...] financial assets. On the contrary, we have a whole cornucopia of options! The squabbling that has preoccupied me lately, between market monetarists and post-Keynesians and mainstream saltwater economists, is [...]

  60. reason writes:

    Ramanan
    This is based on the idea that there is a market clearing level of real interest rates (so that ex-ante savings = ex ante investment).

  61. reason writes:

    Oh – and the market clearing level of real interest rates could well be (is?) negative.

  62. [...] Sankowski here. Steve Waldman has been talking about common ground among the MMT and MM crowds. I think “NGDP level target from [...]

  63. Ramanan writes:

    reason,

    The interest clearing to make S = I is a chimerical description of how and why S = I.

  64. reason writes:

    Ramanan – you missed the bit about ex-ante – very important (ex-post S always equals I – well not really I’m abstracting from the trade and budget deficits).

    But to put it another way – the theory is that at any point of time their is a unique REAL interest rate will push down consumption and push up investment sufficiently to ensure full (however you define that) employment. If that rate is negative and inflationary expectations are very low, you have a problem, because holding money will produce a higher return that investing it. Sorry but if you can’t understand that, I can’t help you.

  65. [...] people argue with Steve Randy Waldman when he says that MMTers, post-Keynesians, and Market Monetarists agree on lots of things… [...]