A note on model risk, policy design, and political alliances

My previous post advocating a collaborative detente between post-Keynesians, market monetarists, and mainstream saltwater economists, has drawn smart and often skeptical comments. Some critics suggest I understate the dissimilarities between the three schools, and argue that any sort of fusion would amount to a muddled middle, centrism only for its own sake. (I like this: “The centrist position on building a bridge would end up with a bridge halfway across the river.”)

If I were advocating some kind of Grand Unified Theory, I might concede the point. But I’m not advocating a theoretical fusion at all. I’m advocating a policy compromise. Quarreling schools may not find very much common ground in arguments over theory. Theory and its inseparable twin, ideology, are too pervasive to admit much compromise. They are indistinguishable from reality. Our eyes form the world before the world forms our vision. When truth itself is at stake, we will not easily give ground.

But it is not the truth that we are after here. We should strive for something far less grand: to do actual good in the world. It just so happens that the theoretical disputes which divide the disciples and apostates of Keynes do not prevent overlap in the solution space. We can work together even when the stories that we tell ourselves are worlds apart.

And since it is at least possible that my side might be wrong, the existence of others who are almost certainly mistaken is actually helpful. We can build insurance policies out of their errors and make resilient analogues of Pascal’s wager. The point is not to take the best a priori position. The point is to avoid going to hell.

I am not neutral between the economic schools I’ve identified for a love-fest. Although I dislike binding myself with labels, I lean post-Keynesian. I agree with many critics that monetary policy alone is unlikely to be effective, and my gut inclination is not at all favorable to monetary policy as an instrument. I think overreliance on monetary policy, especially during the so-called Great Moderation, played a key role in the development of socially destructive inequality and economically catastrophic patterns of aggregate investment.

But, as the finance types like to say, that’s a sunk cost. We are in a global depression. Despite periods of respite, I think we are likely to remain in a depression until we sort out the immense social conflict embedded in the financial and political claims we’ve accumulated against against one another. This is a bad situation. Last time, it took a catastrophic global war before we put our squabbles into perspective and found ways to engineer a reset. That kind of thing is still not off the table.

The incremental cost of trying a bit more monetary policy seems small to me by comparison. I don’t think it’s likely to work, but I am heartened at least that the variant proposed by the market monetarists is much less toxic than the mainstream dogma that, de jure or de facto, prizes price stability above all things. I’m still skeptical, but NGDP path targeting represents a huge improvement over inflation targeting as a monetary policy rule. I’d be willing to give it a try. In exchange, I’d like to try to persuade monetarists of good will to agree to limits on what constitutes legitimate monetary policy, and to assent to a coherent and non-corrupt fiscal lever as a backstop.

This sets up a wager that both sides should smugly accept. The market monetarists should be glad to accept the fiscal backstop, despite theoretical objections, because they should be sure that it will not need to be used. I can put up with one last big monetary push. I expect it won’t work, but it will automatically open the door to policy that I’m pretty sure will work. In either case, whichever side is wrong will be glad to have taken the bet. There are devils in the details, obviously. There are some forms of monetary policy that I’d consider too destructive to try, that might “work” in terms of restoring growth in macro aggregates but that would threaten social values I hold dear. The “fiscal lever” is unlikely to be a decentralized job guarantee engineered by Pavlina Tcherneva and Randy Wray, which in a more perfect world I’d like to see given a try. But the world is as it is, and time is of the essence.

One of the worst unintended consequences of the Obama administration is that it has discredited compromise. We can argue about whether Obama was hapless and naive, or whether he was cynical and canny, using compromise as a fig leaf to promote the center-right outcomes that he actually favors. But to the progressive left, “compromise” has come to mean sacrificing core ideals and values as the starting position in negotiations that only gets worse.

But compromise is not always a bad idea. Sometimes there are people with whom one can find common ground despite important, even fundamental, differences. That doesn’t mean we smudge away the disagreements, that we cease to argue the merits and demerits of conflicting models and worldviews. But we shouldn’t let our debates in the seminar room prevent or delay finding a practical consensus. If we are not, all of us, just a constellation of egos engaged in a masturbatory pissing match to establish our place in academic or journalistic hierarchies, then we need to find ways to leaven our disputes with provisional compromises and coordinated efforts to improve the real world. In real time.

 
 

57 Responses to “A note on model risk, policy design, and political alliances”

  1. winterspeak writes:

    Aaah, the job guarantee.

    If you want to put Market Monetarists, Krugman, MMT, and hard-core MMT in a spectrum it would be around just how directly they want to tackle unemployment. (The difference between MMT and hard-core MMT is that hard-core MMT require a JG).

    Market Monetarists are most indirect in their quest for employment, having no mechanism to achieve this at all. But they mean well.

    Krugman would tackle unemployment by hiring more Government Workers. He also likes Bridges to Nowhere.

    MMT is OK with Government Workers, and Bridges to Nowhere, but are also OK with simply cutting taxes and putting money in household’s pockets. (A brief aside — what does it say about where economic theory is that a situation where households are short of money is dealt with in every that that AVOIDS actually giving households more money?)

    Hard-core MMT would fire up the JG, which is unarguably direct (although has other problems making it, IMHO, a bad idea. Nevertheless, I do not deny that it goes right for the jugular. Or is that left for the jugular?)

    SRW: How about this compromise — why don’t you agree that Cheney was right, deficits don’t matter, and cut taxes? We can also set the FFR at zero and leave it there. Since Bernanke no longer has anything to do, he can go on a speaking tour where he scrunches up his face and says “I wish I may, I wish I might, have higher NGDP!”. Sumner can cheerlead to provide social proof.

    Oh yeah, we can also finally take down Wall Street because the Cheney deficit can step in for the collapse in horizontal money. It’s much easier to muzzle banks when you don’t need them to lend so much.

    Something for everyone!

  2. I completely agree. People are way too concerned about theoretical disagreements than over pragmatic common ground. I also think there is an epistemological point here: if your theory implies you should do x, and as long as there is a non-zero probability that a theory that is inconsistent with yours is correct, the fact that the competing theory also implies you should do x ought to increase your credence that x is a good thing to do. People (and academics in particular) tend to underestimate the epistemological value of common ground. Shame we expend so little effort finding it – although a corollary of the above is that if you can persuade people that they shouldn’t be so confident that they are right, then the epistemological value of common ground increases.

  3. Ramanan writes:

    SRW,

    The world has grown over the last several years because the United States acted as the importer of the last resort. It hurts the U.S. by draining demand, the nation grew because of private sector deficits. Also, the United States made a good killing on its foreign investment abroad, somewhat negating the effects of the trade deficits.

    As someone said “In the long run Keynes is dead” and this is a great punchline. Whatever theory one can come up with for improving growth, it will worsen the global imbalances. One good thing about the crisis is that people have figured – at least vaguely – that fiscal expansion works. However, there is a general lack of understanding of how useful fiscal policy is and when it has to give in – especially in an international context.

    I suspect none of the people you have referred in the recent past on this blog understands this. You – on the other hand – once mentioned to me that you were a balance of payments worrywart and it was the reason you started this blog.

    So a “grand bargain” is needed – as Mervyn King emphasized in his talk “Global imbalances: the perspective of the Bank of England”.

    http://www.bankofengland.co.uk/publications/Documents/speeches/2011/speech473.pdf

    And this grand bargain cannot be thought of being conceived unless economists take the route you seem to suggest. It’ll be great if you could push this idea of bringing economists together further. I still disagree with your previous post that differences are minor and it may actually help if it is stressed that the differences are major – yet there should be an effort to find a common path.

  4. david writes:

    Post-Keynesianism has a lot more than Minsky and the emphasis on the distributional effects of monetary policy; there are also non-profit-maximizing firms, satisficing managers, failure of gross substitution amongst household preferences, etc.

    It is those put together that give the Post-Keynesian ‘paradox of costs’ and other strong results that eventually lead one to a universal job guarantee as a long-term solution.

  5. catbert writes:

    If we are not, all of us, just a constellation of egos engaged in a masturbatory pissing match to establish our place in academic or journalistic hierarchies, then we need to find ways to leaven our disputes with provisional compromises and coordinated efforts to improve the real world. In real time.

    You had me there. Now I am an official part of the Steve Randy Waldman army.

  6. Dan Kervick writes:

    Since I suspect it will not really matter much if the Fed moves to NGDP level targeting, then I have no serious basis for objecting to NGDP level targeting as an alternative to the present regime.

    My objection is only to suggestions that such a change in monetary policy regime is a substitute for what is most needed. And what I think what we really need is more spending, more public investment, more public hiring and employment security, bigger deficits, and an end to the public debt fear-mongering and bamboozlement.

  7. K writes:

    I was just about to write a congratulatory comment, and then… that second to last sentence. EEEEW! Is that really necessary? Some people might not have the stomach for your choice of mixed metaphor, in which case the message is compromised. I’m probably a bit prudish, but I doubt I’m the only one who is unnecessarily taken aback.

    Anyways, now that I’ve digested my breakfast…

    Really great post, and a fair challenge to the Market Monetarists: We accept to do things the way you say, if you accept our backup plan for the contingency that, as you say, can never happen any ways. But under one condition: when we appoint Sumner Fed Chairman, he doesn’t get to do fiscal/industrial policy (buying large cap stocks) and call it “monetary policy.” He can buy all the treasuries he wants and go on his I-Wish-I-May tour (see Winterspeak’s hilarious comment above) for a year or so, or until the world gets fed up waiting.

    So now we just make this deal and inform the Fed of their new mandate, right???

  8. Steve Roth writes:

    @winterspeak: “Cheney was right, deficits don’t matter”

    Just to perfectly on this: when Cheney said that “Reagan proved that deficits don’t matter,” he was *not* making an economic statement. He was enunciating the *political* reality that has put, and held, the right in power for thirty years: people love to prattle on sanctimoniously about deficits, but when they walk into the voting booth they don’t care about them at all; they just vote for the person who promises to cut their taxes.

    As for just cutting taxes, I’d be all for it if we lived in real MMT World — printing dollar bills instead of t bills. But the pernicious effect of gold-standard-based “debt issuance” means that government debt and deficits do matter.

  9. winterspeak writes:

    Steve Roth:

    Worry not, I know Cheney actually meant something quite different. But if we’re to live in SRW’s Kumbaya world, then what people actually mean, and what they actually think, is not important and should be ignored if they “prevent or delay finding a practical consensus.”

    What can I say? I guess I’m feeling punchy.

    I mean, here we are, a bunch of nobody bloggers with no influence on anything. The actual halls of power are far removed from interfluidity.com, moslereconomics.com, and sumners blog, so what we do or do not think, whether we agree or do not agree, actually makes no practical difference. Our greatest leverage point is internet debates with Paul Krugman.

    And I find the notion that we do have power to be, frankly, arrogant.

    It is precisely our powerlessness that means we can be honest. We don’t have academic reputations to burnish, we don’t have a world to save, we don’t need to concern ourselves with whether Lloyd’s bonus next year is going to be large enough. In other words, we don’t have to be Politicians, we can simply seek the Truth.

    And you know what, Monetarism is bogus. There is no mechanism. Krugman does not know how banks work. The textbooks are wrong.

    Let’s leave the fudging, positioning, playing nice, horse-trading, and consensus building to the Politicians who do what they must to maintain office and line their personal coffers. Their Power means they cannot seek the Truth, even if they wanted to. Instead, let us accept and embrace our powerlessness, and see that our inconsequence gives us the Freedom to do the right thing. You don’t need to compromise over the inconsequential.

    SRW: you sound like a young person with a good soul. you have ambition, you’ve been invited to the academic job market. Maybe you have a family to support — I don’t know. I respect your practicality and your desire to engage in positive ways, and to seek power and influence. I’m just sharing that there’s power in being a nothing and having no influence at all too.

  10. David Merkel writes:

    Job guarantee eventually becomes “We pretend to work; they pretend to pay us.” I don’t think that works anywhere, but really would not work in America, where many try to game the system.

  11. Peter K. writes:

    winterspeak:
    “I mean, here we are, a bunch of nobody bloggers with no influence on anything. The actual halls of power are far removed from interfluidity.com, moslereconomics.com, and sumners blog, so what we do or do not think, whether we agree or do not agree, actually makes no practical difference. Our greatest leverage point is internet debates with Paul Krugman.”

    Not true. It’s hard to prove, but I believe there have been 4 cases of the econoblogosphere impacting the halls of power (albeit in a weak way but you have to start small and somewhere). 1) Bush’s push to privatize social security (see Dean Baker) 2) St. Louis Fed President engaging Tim Duy over the “output gap” 3)German-style working sharing is in the recent budget thanks to Senator Jack Reed and a Rep.(I forget who) 4) NGDP Level targeting (which Obama’s former CEA endorsed and Krugman endorsed (out of admitted desperation in that they need to do something) and when asked about it by a Times journalist Bernanke gave a sour look. If they were doing it now the lights would be flashing red as they are failing miserably. Some of this is that the ideas percolate up because journalists write stories on them because they have nothing to write about.

    I believe that having no power or influence can have deleterious effects also. Yes you are free from the corrupting effects of power, but as MMTer demonstrate you easily get bent out of shape over non-issues and small stakes like naming conventions.

  12. Dan Kervick writes:

    What is it that so many economists have against politicians and legislatures?

    Is there smarter spending and dumber spending? Of course. But to my way of thinking the key factor for recovery is the size of the deficit. Congress should pick a healthy deficit target based on macroeconomic conditions and try to hit it. Shoot for an appropriate excess of spending over tax revenues. And forget the public borrowing – we don’t need it. If Congress wants to run a $500 billion deficit, then they can pass a one-sentence bill directing the Fed to credit the US Treasury’s account by $500 billion. No muss, no fuss; no more bonds and bills. And no opportunity for debt hysterian demagogues to hype the rising debt.

    So macroeconomists: tell us the right size for deficit. Then leave it to Congress, and the rest of us, to fight it out over where to spend the money. Pork barrels? Earmarks? Who cares? It’s all good: buying stuff that someone has to make. Most of the stuff bought is actually useful. It employs people, and employs them in ways that usually add plenty of value and expand purchasing power. The bridges are more often than not bridges to somewhere, not bridges to nowhere. Pork needs its barrels here and there. The process of fighting it out over many competing and real claims from constituencies in a noisy horse-trading legislature is good stuff, and probably as good an allocation mechanism as we can expect. No offense to you guys in the economics profession. But I trust that process a lot more than I trust some ivory tower economist playing with his policy formulas and NGDP slide rule. You guys really aren’t all that smart, and mostly excel in figuring out how to understand things after they happen than in predicting and guiding things before they happen.

    The central bank’s job should just be to stay out of the way. Supervise the payments system, make sure the financial sector isn’t going Ponzi and leave us and our politicians alone. This whole idea that fiscal policy should be some kind of “backup” for impotent, bald-headed central bank technocracy seems daffy to me. All the real economic oomph in our system lies with Congress – warts, crooks and all.

    The number one service economists could perform for politicians right now is to get it through their thick heads that the deficit is good and austerity is malpractice.

  13. K writes:

    Dan Kervick: “Disagreeing with you people is sooooooo exhausting. Can we please just skip to the part where everyone just agrees with me, and then we can all get on with living happily in the world that I *already* know is going to be perfect? OK???”

  14. Nick Rowe writes:

    Steve: no worries from me. At least in the Canadian context (you Americans can figure out your own policy for yourselves). We had a reasonably responsible (not perfect, but good enough) fiscal position going into the recession, and I’m reasonably confident we will tighten up again coming out. I’m not sure if the fiscal loosening we had was really needed, but it was cheap insurance. If we had had credible NGDPLP targeting instead of credible inflation targeting I would be even less likely to think fiscal loosening would have been needed, but again, if insurance is cheap enough, you still buy it, because you might be wrong. Most of the increased expenditure wasn’t really increased expenditure anyway. It was just preponed expenditure, just done a couple of years earlier than it would have been. And if real interest rates are low, you could probably have justified that preponement simply on micro grounds. So the cost of the insurance might have been negative.

    Here’s the rub though. Suppose you institute the grand bargain. And the economy recovers, and NGDP is on the target path. So then we say “OK, time to tighten fiscal policy back to normal again, to reduce the debt/GDP ratio, so we have plenty of fiscal room in future”. And the fiscalists say “But if we tighten fiscal policy NGDP will go below target and unemployment will rise!” And we will say “Don’t worry, monetary policy has got your back, and we will keep NGDP on target even as you tighten fiscal policy.” And the fiscalists will say “I don’t believe monetary policy will work, so we daren’t tighten fiscal policy!”

    Sorry, no dice. It’s going to be a one-way fiscal ratchet, because the central bank always moves last in a Stackelberg game. Been there, done that. The deal is only enforceable one way.

  15. winterspeak — I like your taxonomy of directness with respect to unemployment, from NGDP targeting through traditional fiscal policy to an explicit employer of last resort (JG). It’s a nice way to think about things.

    That doesn’t make any particular location on that spectrum best, even if you value full employment very much, as the costs of a more direct policy could overwhelm the benefits, and in principle, there needn’t be a correspondence between directness and sustainable effectiveness. But, presumptively, interventions are more likely to succeed at the goals they tackle most directly, and I thin there’s a fair correlation between enthusiasm for fiscal / ELR-esque policies and prioritization of employment as a problem.

    I’m broadly in favor of replacing horizontal money with vertical money as a way of diminishing our dependence on corruptly arranged private banks. (I offered that suggestion explicitly here.)

    Echoing Steve Roth below, nobody believes that deficits don’t matter. The MMTers think that deficits matter perhaps even more than the Peterson crowd does — it’s just that the “fiscal hawks” thinks that deficits always matter in a good way, while the MMTers think that deficits often matter in a good way!

    With respect to your proposal of letting monetary policy do its best (I think you are a bit dismissive in your characterization of what monetary policy’s best might be) and conducting fiscal via tax cuts, I’m down with that to the degree that the tax cuts are very broadly targeted. If they are income taxes, I am not down with it at all; if they are payroll taxes I’m with it; if they are a refundable per-head tax credit, I absolutely love it.

  16. Richard — That’s a very interesting way to put it, and unsurprisingly I agree. A finance analogy is, within certain parameters, uncertainty should correlate with diversification. If we are absolutely sure of what policy will work, crafting an intervention that mixes bad ideas with good is just silly. But as uncertainty over correct policy grows, it becomes more and more useful to craft diverses mixes whose failures are uncorrelated, or correlated inversely. In macro, perhaps I am a wuss to say so, but I think we should all acknowledge a fair degree of uncertainty with respect to the efficacy of our preferred interventions. Epistemological humility implies diversification across interventions, for people who are sincere in their humility.

  17. Ramanan — I don’t disagree with any of what you say. At a tactical level, if nothing else, my attempts to minimize theoretical differences seems to have been counterproductive — proponents of different theories are very eager to differentiate themselves from their rivals even if, from a certain distance, I perceive some deep similarities. (You say the similarities are superficial, but I think we both have better ways to spend time than to argue over the depth of disagreements.)

    Re balance of payments issues, I remain very concerned, and agree that any sort of “stimulus”, fiscal or monetary, risks exacerbating imbalances. I’d love to see more “grand bargaining” about how to tackle BoP problems. A start would be some consensus — which remarkably still does not exist among economists — that balance of payments is a legitimate object of policy, not simply a market outcome that should be presumptively immune from interference.

    I think that the key to addressing BoP issues is to legitimize unilateral, nondiscriminatory interventions in the capital account to penalize or restrict debt capital inflows. Intervention in the capital account is neutral across categories of imports and exports, so it is not “winner-picking” trade protection. Preventing capital inflows is much less objectionable than restricting outflows on strictly libertarian grounds. (It is one thing for a country to say we don’t want your money — there remains a whole menu of alternatives. But to say you must keep your money in our country is chafingly restrictive. Historically restrictions of outflows are leakier than restrictions on inflows, although both leak quite a bit.)

    Though I absolutely do think BoP issues should be at the center of policy discussions, I don’t think we should refrain from stimulus (fiscal or monetary) for fear of exacerbating deficits. But BoP concerns might condition our interventions. To the degree that a country runs persistent current account deficits, that mitigates in favor of inflationary policy (which engenders capital outflows by virtue of devaluation of foreign claims in terms of domestic goods and services) to offset and discourage foreign finance of new imports. The degree to which price stability is a desirable concomitant of stimulus should be conditioned on trade balance.

  18. david — Post-Keynsiansism is a very large tent. I’m sure I’ve hardly explored even a corner of it. That said, I’m also pretty sure there will remain some heterogeneity among post-Keynesians in terms of preferred policy solutions, although quite a few seem sympathetic to a job guarantee.

  19. catbert — Hah! My urinomaturbatory mind control experiment has proved dastardly effective!

  20. Dan — I agree that it’s important to not let what you consider ineffective policy to substitute for what you consider effective policy. That’s very important.

    But if the placebo and the medicine don’t have adverse interactions, rather than fighting endlessly over which to take, why not just agree to take both?

    In the real world, obviously, that’s too glib. Monetary policy is offered as a substitute for fiscal policy. But the monetarists, I find, are not foundationally averse to considering fiscal as well, if we overcome some institutional objections. (I think those institutional objections are wel-founded. More on that when I respond to your second comment below.) Fiscalists have little to lose by traveling along on the monetary side in exchange for a cease-fire in the which-is-better wars. Or at least we might: we don’t know the terms of the detente yet, but if the infighting aggegate-demandists would explore the space of solutions they’d each accept, they might well find a point of overlap.

  21. Hi all,

    WS – I disagree on the power of this crowd. Paul K reads every SRW post. Nick Rowe is a well known public intellectual. SRW himself was invited to talk with high ranking govt officials. Cullen’s blog gets many thousands of visitors a day. Scott Sumner forced a response from Bernanke on NGDP targeting

    We’re not king of the world, and I don’t have any illusions about how much ability we have to influence the world economy. All I know – we’re making a small but non-zero impact.

    David Beckworth’s article today about aggregate demand was excellent. We have an aggregate demand problem, and we all agree this is the problem. Now, if Scott sumner could simply recognize bernanke is begging the government to spend and letting the fiscal multiplier be much larger than zero, we could even have something like a consensus.

    And why didn’t you just call non hard-core MMT MMR? Everybody here knows MMR pretty well! ;)

    I liked the last post by Steve, where he went for the “best from all schools” approach. We need fiscal rules to keep the monetarists calm about inflation, we need to recognize fiscal works, and we need to recognize Molsers “price not quantity” observations on fed actions recognize price has an impact on credit creation.

    Dan K, I prefer NGDP level targets over inflation targets too. I’d be happy to shift to NGDP level targets.

    Steve Roth, Cheney was making a political statement, but I really think the upper levels of R’s have adopted a twisted evil form of MMT.

    Nick, yeah the fed moving last is a problem. I’ve been thinking we need a set of unified fiscal/monetary policy rules.

    Steve W and Richard, that’s a great observation – uncertainty implies using diversification to overcome that uncertainty. Here’s a similar idea, but one which doesn’t use diversification: Imagine George Soros was designing policy. How would he design policy? He’d switch from policy to policy until his back stopped hurting!

  22. Steve Roth — One good thing about monetary policy is that it converts T-bills into dollars! I’m not sure how much I think that matters, especially since now and for the foreseeable future, at least in the United States, T-bills and dollars are likely to offer the same yield, and it’s unclear for how long the yield will be zero. So, if what troubles you about “debt financed” deficits is the transfers of real purchasing power they engender to no-default-risk creditors (and the taxes that must sometimes be levied to prevent that from provoking inflation or high interest rates), then the debt/money distinction may have grown permanently less useful…

    Thanks for putting our beloved former VP’s remark into context. As I suggested to Winterspeak, he is as always an unreliable interlocutor, at least beyond the context of political Machiavellianism. Deficits matter under every macro view I know of. It’s just that some macro schools see only costs, and some see costs and benefits, such that benefits sometimes overwhelmingly exceed costs.

  23. beowulf writes:

    “but I really think the upper levels of R’s have adopted a twisted evil form of MMT.”

    I didn’t think there’s any question about that. Warren Mosler has written that,
    “The origin of MMT is ‘Soft Currency Economics‘ [1993] at http://www.moslereconomics.com which I wrote after spending an hour in the steam room with Don Rumsfeld at the Racquet Club in Chicago, who sent me to Art Laffer, who assigned Mark McNary to work with me to write it.”
    http://moslereconomics.com/2011/08/04/mmt-history-and-overview/

    Rumsfeld hired Cheney to be WH Deputy Chief of Staff for Ford, and Cheney returned the favor by hiring Rummy to be SecDef for Bush. While Cheney was in the WH, of course, Art Laffer famously drew the first Laffer Curve on a cocktail napkin for him. So when Cheney said “deficits don’t matter”, he was most assuredly familiar with MMT (if not hardcore MMT). :o)

  24. Dan Kervick writes:

    But if the placebo and the medicine don’t have adverse interactions, rather than fighting endlessly over which to take, why not just agree to take both?

    No problem with that SRW. But it sounded like you were saying the deal is that we should agree not to take the medicine for a while, until we give the placebo a shot. But we’ve already been putting off the medicine for a long time.

  25. winterspeak @ 9 — I think that “power” is endogenous, that people when they organize and express coherent preferences and work to persuade as identifiable groups can be very powerful. Despite some minor victories as described by Peter K and Mike, I think “we” are not so powerful because we have failed to do such obvious things as find common ground among disparate conversants and work together to advance the agendas we can collaboratively support. There is a lot of latent potential here. We talk but do not organize.

    I certainly do respect the blogosphere as a forum in which ideas are advanced and challenged for their own sake. I have learned immeasurably, and continue to learn every day, from participating in this space. And your points about the advantages of being a nobody are well-taken. At conferences, I’ve noticed the intellectual interestingness of a talk is often inversely proportional to the prominence of the speaker, especially if that prominence reflects political power. Powerful people self-censor. They behave like active portfolio managers, deviating in small ways to differentiate themselves, but always benchmarking themselves to a consensus.

    All that said, I don’t think good intellection and coalition building are mutually exclusive. Plus, I think there are diminishing returns to some of our debates. I think the controversies over fiscal and monetary policy have now been endlessly rehearsed, knee-jerk sides and positions have been taken, and the continued vigor of the conversation is supported almost entirely by the impulse to affiliate with and praise our own side and to mock and diss the other side. When the conversation gets a bit stale, when the arguments for both sides seems to have been educed and protagonists have retreated to their corners throwing perfunctory spitballs at the other side, it seems to me that the cost in terms of truth-seeking of evaluating similarities and differences is low. It would be a shame to prematurely end a fruitful debate in search of a kumbaya. But it’s also a shame for people with some differences but also with much in common to continually rehearse an old dispute rather than to find ways of putting what they’ve learned from one another to good purpose.

    BTW, I’m not on any academic job market, and if I’m ambitious I must be particularly short of talent. My status is best described as “washing out of graduate school, for the second time”. Perhaps I’ll find a way of getting a degree out of this, perhaps some day I’ll be on some academic job market. But the odds are against any of that at this point. I may be a minor supervillain in one niche of the blogosphere, but in real life, I’m just an eccentric species of fuck-up. I’m not sure whether any of this matters to our conversation, but sometimes I think it might. (I’m not so young either, btw. I’m in my 40s.)

  26. David M — So, I’m certainly not a job guarantee fetishist, and there are many variations on such a thing for which I’m sure your critique would be perfectly apt. My initial reaction to the proposal was a very extreme skepticism.

    But there are a wide variety of potential institutions under the phrase “job guarantee”, some of which might be more resistant to the prospect of being gamed by nonproductive “workers” and the bureaucrats who arrange them. And there are significant potential benefits to the idea, in that it literally targets unemployed resources (yes, it’s rude to call humans that — oh well), so the real economic opportunity cost of expenditures is low. Whether a destructive dynamic of dependency sets in depends a great deal on program design. While as a matter of political economy, you can argue that in the US an job guarantee program will devolve into a nonproductive teat, I think it’s worth exploring the range of potential programs and thinking about their propensity to devolution before coming to that conclusion.

    The Tcherneva version of the job guarantee is intriguing, in that it distributes the work allocation to the nonprofit private sector. I have very mixed feelings about the US nonprofit sector, which in my view is often more exploitative of its paid employees than the for-profit sector and quite corrupt at its richly paid top. But at least there would not be a unified bureaucracy of bureaucrats organizing the labor corps, and it would be possible to organize useful competition for access to state-funded labor. A job-guarantee program is a means-tested benefit in the best possible way: the benefit is accessible to anyone, but only people who really need to money will take it, as the requirement that one submit to labor naturally discourages those who can do without work, financially and psychsocially, from participating. Plus, a busybody program that keeps otherwise unemployed people out and interacting, especially if there are incentives to on-the-job-training and “private sector” graduation could do a great deal to prevent the personal harm and economic decay associated with unemployment. Essential to the idea is that the wage rate is low compared to most private sector employment, so that employees would really want to graduate. I suspect there would be perpetual JG users, but they would be people who would be persistently unemployable in any case.

    The job guarantee sounds like a flaming left-wing plan, and that’s the way I think its MMT-ish proponents prefer that it be perceived, but despite their objections, it is neither “left” or “right”. Another term for the job guarantee is “workfare”, which is associated with conservative objections to the dependency culture of welfare. MMTers are at pains to say that what they advocate is not workfare, because they don’t advocate dismantling existing unemployment and welfare benefits or making their receipt conditional on work. They argue that the job guarantee should be an additional option for the unemployed, one which imposes no new cost or obligation. But in reality, policy regarding taxpayer support for the unemployed cannot remain so segmented. The raison de etre of “emergency” extended unemployment insurance, which is already politically contentious, would be sucked away if a job guarantee were in place. Whether the resulting program looks like a conservative or liberal plan would depend very much on the terms under which the job guarantee was extended, how much bargaining power would be available to potential participants in terms of accepting work, how much they’d have to lose from nonperformance.

    It’s possible that a JG could devolve in the too generous direction as you suggest. It’s also possible that it could devolve in a too punitive direction, where people who are chronically unemployable by the litigation-vulnerable private sector are treated cruelly in order to be made productive by exploitative masters. There are many ways that such a program could go wrong. But there are also ways that it could be designed right, and at least in theory, a well-designed program could have negative fiscal cost and offer profound social benefits. I’d like to see some local experimentation, funded by Federal grants perhaps, so we can see if we are politically capable of getting it right. I don’t think we can resolve the question hypothetically. As in most real-world ventures, trial and costly error is the most effective form of R&D.

  27. Peter K — Thanks. You are a bit more optimistic about our “power” than I am, but I think that Winterspeak is a bit too pessimistic, and I appreciate your hopefulness. More on this in my response to Winterspeak (#25).

    And I agree with you about the costs, intellectual and human, associated with conversation in a context of perceived powerlessness. There are benefits to being at the fringe, but they don’t come cheaply. I think both sides are on parade among the post-Keynesians who, on the one hand, have developed some really creative and compelling ideas, but who on the other hand come off as bitter and unappeasably oppositional sometimes.

  28. Dan @ 12 — This is a place where I think that monetarists’ criticisms are in fact very well grounded.

    I agree with you broadly that economists (including monetarists) often have a troubling affinity for either market fundamentalism or elite technocratic managerialism (depending on their politics), and with that a barely suppressed disdain for democracy. The most honest libertarian in the blogosphere, Bryan Caplan (whom I’ve met and is surprisingly bizarrely warm in person), expresses this tendency very openly (the market fundamentalist version), and even wrote a whole book about it. (The Myth of the Rational Voter) Much as I like Bryan, I detest that impulse.

    But, I think I’d find a bit of common ground even with Bryan, who points out that democracies vary a great deal in scope and organization, and that “democratic” institutions can be designed well or poorly on axes that don’t obviously relate to democratic accountability or legitimacy.

    I am a very strong believer in the importance of democratic accountability and control over the functions of government, including economic functions. In my view, “independent” central banks are, at present, insulated from democracy but wide open to plutocracy. But, even if I’m right about that, it doesn’t imply that leaving the details of macro policy implementation directly in the hands of Congress is a remotely good idea. It’s really not, it’s just a terrible idea.

    The FDA was created by Congress, and is operated by a democratically elected executive subject to the purposes and constraints outlined in a law passed by a democratically elected legislature. But Congress does not directly decide what drugs are to be approved or not approved. It does not right the procedures and regulations through which the FDA gives substance to its legislative charter. Congress, as an institution, is simply not well-suited to that sort of thing. Those operations are delegated.

    But the delegation of those operations doesn’t imply an abdication of oversight. Congress always has the right, if the semi-demo-/semi-pluto- cratic forces that shape it, to alter how FDA operated, override its decisions, or even abolish it.

    Similarly, macro policy is not well-suited to direct operation by the legislature, whether it be fiscal or monetary policy. I am not in favor of “central bank independence”. That strikes me as an extremely overrated principle. In countries with good governance and fiscal slack, central banks perform reasonably, regardless of formal independence. In Zimbabwe’s with poor governance or Greece’s with little fiscal slack, central banks print when they can get away with it. There is some empirical literature on this, and from what I recall the consensus is that “independent” central banks do a bit of a better job of mitigating variance of inflation (I’m working from memory and may be mistaken! It’s been a while since I looked!), but there is no overwhelming benefit associated with a semi-privatized central bank whose officers are intentionally isolated from democratic accountability that might not be accounted for by fiscal slack and overall quality of governance. I think we should think of the Fed as something along the lines of the FDA, an accountable government agency, not a fiefdom to itself (and we should modify its governance to make it so).

    But that doesn’t mean that Congress or the President should micromanage its day-to-day activity. It should be given a mandate and some tools, and then permitted to uphold that mandate. Nothing discredits fiscal policy more than the fact that in order to implement it, “horsetrading” and “earmarking” inevitably happens. The micro dimensions matters politically and socially as much as the macro dimension does. If the public perceives expenditures to be corrupt or wasteful, it will be impossible to sustain a fiscal regime (unless the beneficiaries of the corrupt or wasteful spending are particularly powerful plutocrats). We need some means of implementing fiscal policy that will be widely viewed as fair if we are to have fiscal policy at all, and discretionary stimulus legislating, with all the necessary buy-offs of legislators, is not a decent way to get it. Further, good macro policy, including fiscal policy, probably really does require some predictability and consistency, as the market monetarists often emphasize. It probably requires the ability to act at high frequencies. We really do need (in my view) fiscal policy, but we really do need to develop some means of administering that policy that is widely agreed to be fair and effective. “Automatic stabilizers”, including a job guarantee, would be one way of doing that. So would empowering some agency to adjust some broadly targeted tax-or-transfer rate, as forseen by both MMT and Market Monetarist proposals for using payroll or sales taxes as a macro instrument.

    I agree with you very much about the need for public investment, and transfers-based stimulus is a wasted opportunity when fiscal expansion might have been used to endow new infrastructure. But macro policy is ultimately about the rate of expenditure or taxation, not its target. If we are creative (a la Haitao Zhang), we can come up with ways of legislatively or democratically determining a queue of targets for expenditure, but letting macro policymakers adjust the rate at which those targets are funded, so that depressions are used as opportunities to accelerate public investment. I’m hugely in favor of this idea. But it’s perfectly consistent with having a democratically chartered macro agency adjust the stance of fiscal policy to help manage macro variables like total expenditures and aggregate leverage.

  29. Nick — I think that it is really important, profoundly important, impossible-to-overemphasize important that we distinguish the fiscal / monetary debate from arguments about the institutional structure through which the different sorts of policy are currently implemented.

    I don’t agree with your critique even in the current institutional environment. Your Stackelberg game analogy presupposes a world in which, not only does the central bank “act last”, but it gets to act just once. The dynamics of a repeated Stackelberg game are much more complicated, and a large variety of equilibria are possible. I cannot speak to Canada, but in the United States I think it unquestionable that the central bank’s ability to hike interest rates in the name of thwarting hypothetical inflation has affected fiscal policy. That would be impossible in the single-round Stackelberg, where the one who “acts last” has no choice but to follow the leader.

    But even putting all that aside, if we wish to add a fiscal lever to macro policy, I very much we hope we add it in a different institutional context than ad hoc action by legislatures. You’ve persuaded me that fiscal policy should be rules based and gamed out in terms of expectations! See my not to Dan above (#28).

    If the central bank (or its successor, there might be a huge, pointless left-right structure over whether a macro agency should be called the central bank) has control over both monetary and a pre-agreed fiscal lever, then fiscal policy is never privileged because the bank must react to acts of legislative fiat. If, as I suggest in the previous piece, the central bank is mandated to target NGDP and leverage, then the degree to which it is fiscally expansionary or contractionary will be conditioned upon the fiscal stance of the general government. If the general government is very expansionary fiscally, private sector leverage will be low and falling, and the central bank will choose nonexpansionary fiscal and tight money to restrain NGDP. If risks to NGDP are to the downside, the central bank will use a mix of fiscal or monetary tools to expand, with the degree of fiscal a function of the degree of private sector leverage. The central bank will continue to be a higher frequency actor than the legislature (which today as in the future gives it a game theoretical advantage rather than the disadvantage implied by the Stackelberg analogy). The general government would have to condition its fiscal stance, as it does today, on the risk of high interest rates from the central bank if it fails to tax finance expenditures.

    There would be no more fiscal ratchet than there is today. Macro-induced fiscal expansion would be undone by the very same player, the central bank, that did it in the first place. If anything, there would be less fiscal ratchet. Under status quo arrangements, fiscal expansions are indeed sometimes justified by ad hoc Keynesianism that the legislature then fails to ever undo. (In the US, the Bush tax cuts, enacted during the dot-com hangover often with vulgar Keynesian rationale, are a very famous example.) With a fiscally empowered central bank in place, there would be no reason for this sort of ad hoc legislative Keynesianism. The central bank would adjust its fiscal lever, reducing certain taxes and/or increasing the rate of transfers and expenditures. The central bank would withdraw the support when its expenditure and leverage mandates can be met without fiscal support. There would be no difficult-to-do legislative authorization associated with the expenditure.

  30. Mike — Agreed agreed agreed agreed agreed agreed agreed. I’m sorry to be so boring and uninformative.

  31. beowulf — Wow!!! What a tale. The MMTers caused supply-side economics! Made the Iraq War possible too. Those bastards.

    Really. That is quite a story. Mosler is an interesting figure, defying (to his credit) left-right characterization, with a history I’m sure we barely know. It’s delicious that a set of ideas codified due to a conversation with Rumsfeld would today have its home among a bunch of post-Keynesians at the Levy Institute and UMKC.

  32. Dan @ 24 &mdash I agree we’ve put the medicine off for much too long. But as a practical matter, will we get it faster if we ally to form a demand-side consensus that requires us to give (much better targeted!) monetary stimulus one more bite of the apple, or if we spend our time arguing with people who have, quite justifiably, become widely respected, and with whom we might make common cause?

    We have no choice but to devote energy to fighting with the hard-money right which, however intellectually marginal, is politically near hegemonic, as its ideology justifies policy that is least-risk to the interests of large creditors. During this time we spend squabbling with the monetarists and Paul Krugman(!), we could spend uniting with them and fighting with those guys. Letting the monetarists impose their (actually pretty good!) target, and letting them try probably insufficient means to hit it for a while, might be a faster path to good medicine than our self-marginalizing infighting.

  33. winterspeak writes:

    SRW: I do not support JG, but I also do not support the completely ineffectual Monetarism. My mind is open, but it has not fallen out entirely. And on the subject of minds, I like head taxes (and head credits) the most.

    wrt to power, I do not see the value in compromise when you are a nothing and have Truth on your side. This may be an impractical position, but if one does not seek actual power, then practicality is a secondary concern. You can then focus on more quotidian pursuits like pointing out that since bank lending is not reserve constrained, Monetarism (and therefore economic textbooks are bogus).

    And I do not know what “endogenous” has to do with it. However hard I feel about what FFR should be, for example, I cannot set it because I am not Bernanke. Maybe if I was more endogenous, then somehow my emotions would translate into FFR? If you can tell me how, sitting at my keyboard in the middle of nowhere, being a no-one, I can re-write textbooks or set monetary policy, I would be grateful. Perhaps if I posted on more forums?

    My interest is not in organizing, but in perceiving what is true. These two are historically at odds.

    There is an old book I would recommend about the sociology of philosophy, that lays bare just how much schools of thought rise and fall on relationships, the ability to exploit mechanics of the academic system, and good ole fashion politics. We are fortunate that, in this topic, we can fall back on reality (if one rejects Monetarism) and simply state that the Earth revolves around the Sun, and Monetarism has no mechanism. Anyway, the merits of coalition building vs destruction are laid out clearly, and right now MMT could do with more allies, but fundamentally, since it is right, it can just hang tight if it wants.

    Progress will come via funerals.

    PS. Sorry I thought you were a young person on the academic job market! I meant this as a complement. If you are 40 years old, but still so intellectually curious, then my respect (which was great) is doubled. You have the voice of a young man.

  34. Nick Rowe writes:

    On independent vs democratic central banks: think of a central bank as being like the judiciary. Free from partisan interference, but that doesn’t mean they can do whatever they feel like doing.

    A clear target squares the circle, because it makes the central bank accountable. Have both the central bank and government sign off on the inflation (or NGDP) target for the central bank. Then the government backs off and lets the central bank use its discretion to hit the target. (It’s never quite that clear in practice of course, especially when the central bank must act as lender of last resort.) This is roughly how the parliamentary countries have resolved the problem.

    Steve: OK, lets imagine a repeated Nash game, sequential moves.

    M: “OK, NGDP is on target, but the deficit is too big, so you tighten and I will loosen”.

    F: “That’s just cheaptalk, but this is a repeated game, so maybe I can trust M. Trouble is, even if M does what he promises to do, will it work? If I’m a real fiscalist, I know it won’t work, even if M is being honest”.

    What happens next?

    1. Suppose, just suppose, that F does tighten, and M does loosen, and NGDP does stay on target. What happens next?

    F: “Wow! M did work after all! OK, you obviously don’t need me at all! Over to you M. You control NGDP, and I will go back to doing micro stuff. We don’t need this deal”.

    2. Or, suppose that F does tighten, and either M doesn’t loosen, or M loosens and it doesn’t work, and NGDP falls below target.

    F: “Deal’s off M. You didn’t keep your side of the bargain!”

    If you have two independent players, if you want F to tighten and M to loosen, you need M to target 5% NGDP and F to target 4% NGDP. Which doesn’t really make sense, on a longer term basis.

    Yes, it needs a different institutional structure. 1776 and all that.

  35. Becky Hargrove writes:

    I felt compelled to come to the defense of the Market Monetarists because of the increasing bad press they are getting in more public places of the Internet. The person who does not check much further is led to believe Market Monetarists are mostly hard right wing, anti-government and anti-democratic. Compassion for humanity exists here much as it does everywhere else, and such characterization has not been either fair or helpful. I get nervous when arguments such as this happen because they only set back, even further, vital action and solutions which could be embarked upon in the present. As an advocate for the poor and the marginalized, in the past few years I came to respect the Market Monetarists for their openness and willingness to listen to potential ideas and solutions, even from non-economists such as myself. There seems to be a desire amongst this group for the public as a whole to take on a greater role in economic life in the future, at a grassroots level.

  36. Travis writes:

    “A clear target squares the circle, because it makes the central bank accountable.”

    That is not what anyone means by democratic accountability.

  37. beowulf writes:

    Yeah, Warren is a great guy and smart as a whip. If he had gone into a life of crime, he’d be a supervillain. Fortunately for society, he’s on a born doer of good.

    To switch gears, I think the days of the Fed as an independent central bank are numbered. Prior to 1935, the President could both hire and fire Fed governors, which means he had the whip hand (such as it was, the Fed Board was weaker in those days). It wasn’t the Federal Reserve Act of that year that changed this but rather, like an asteroid strike no one saw coming, in an obscure case involving a deceased FTC commissioner, the Supreme Court overruled existing precedent and stripped the President of the power of firing independent agency heads without “cause” (basically, it takes an indictment to fire someone).
    As it happens, Team Scalia has been chipping away at this decision, Humphrey’s Executor v. US, for years as a violation of the President’s “unitary executive” powers. If Humphrey’s Executor were ever overruled, the Fed would once again work for the President. Which I’m fine with (if you can’t trust the fellow who controls our nuclear arsenal, who can you trust?), but I imagine it would give independent central bank fans the vapors.

    Anyway, there’s a Nuclear Regulatory Commission case winding its way through the courts (In Re Aiken County) that could end up being the next asteroid strike, or maybe its some other case out there we won’t know about till after it lands. Economists don’t seem to have given much thought, if any, to what a post-Humphrey world looks like, maybe they should. If you don’t mind the legalese, here are two great Volokh Conspiracy posts on this topic (the second specifically about the Fed)
    http://volokh.com/2011/07/01/a-thought-provoking-look-at-independent-agencies/
    http://volokh.com/posts/1207512634.shtml

  38. Nick — I think the institutional change we are talking about is more 1867 than 1776. It really would not be a huge deal to give a central bank authority over a fiscal lever. It would be a usurpation of the democratic power of the purse if a central bank could direct expenditures in any way, but as long as the target of the policy is set by the legislature, there is no real barrier to having central banks adjust the rate of expenditure.

    Central banks already have the power to exercise a particularly convoluted form of fiscal policy, by underpricing credit risk on asset purchases. That lever is much more liable to circumventions of democratic accountability than straight-up fiscal interventions. We saw during the financial crisis, when the US Fed took the downside risk of Bear Stearns for JP Morgan, and we are seeing it now in Europe, where the ECB is obviously paying well above what markets would accept for sovereign credits, even for credits like Greece and Portugal that cannot plausibly be argued to be “solvent absent a self-fulfilling rate spiral”. As Market Monetarists have argued, if interventions are necessary to save the macroeconomy, they should be targeted broadly via policy levers agreed ex ante to avoid moral hazard. I’m with, e.g. Scott Sumner, in arguing it would have been better for the US Fed to counter financial disruptions with monetary policy of a whatever-it-takes intensity to maintain expenditures rather than with smaller but distastefully targeted interventions that are accurately called bail-outs. In the moment, though, policy makers were unwilling to take that bet given the tools that they had. In Europe, it seems entirely implausible that a Cochrane-esque solution of letting sovereigns fail could be countered by loose policy of the ECB. It’s hard even to talk about what loose policy would mean if it doesn’t include underpricing the credit risk of Euro sovereigns. In the US, in Europe, perhaps someday even in Canada, a broadly targeted overt fiscal lever could substitute for the existing covert fiscal levers of central banks.

    As a political matter, there wouldn’t be much populist opposition to the notion that central banks should be able to, e.g. contribute to entitlement trust funds in lieu of taxation to stimulate the economy. There would certainly be elite opposition to a central bank fiscal lever, but there is elite opposition to any change that facilitates expansionary macro policy, as inflation is the central economic risk that faces elites, who so far have not been made to fear the prospect of a catastrophe on the supply side could render their financial claims worthless. There is and will continue to be elite opposition to any change that promotes expansionary policy, including NGDP targeting without any change in the central bank’s toolset.

    As an intellectual matter, it really is helpful to distinguish between objections to fiscal policy that are based on institutional considerations and economically grounded objections. Fudging this is one way that Market Monetarists and post-Keynesians unhelpfully talk past one another. Post-Keynesians make an economic argument in favor of fiscal policy (“fiscal expansion contributes income to private sector agents, reducing their propensity towards precautionary saving”). Market Monetarists rejoin with an institutional argument (“legislatures can’t do macro policy consistently and in real time”). Both are great points, and each should be disputed or acknowledged on its own terms.

  39. Becky — Agreed. There’s too much bad press for too many people of good will of every economic school. Picking fights becomes a distraction from and a substitute for clarifying points of genuine disagreement, and acknowledging that we are all part of an important common enterprise.

  40. Winterspeak — There can definitely be tensions between thinking well (“perceiving what is true” strikes me as too grand a goal for any of us) and organizing. But those tensions are not necessarily insuperable, and sometimes the bridge-building required to organize people can contribute to rather than detract from ones thinking. And we are thinking about these things, seeking truths if you prefer, for some purpose. Knowing we are right while watching policymakers do everything wrong won’t be much consolation if the world goes up in flames. I do think it’s worth trying to seek both goals, getting things right and getting applied what you got right. It is not a matter of seeking power, it’s a matter of participating the the maintenance and improvement of a society.

    You don’t get to set the FFR, but neither does Ben Bernanke. The process by which the FFR is set is social and political, and endless jockeying of impulses, interests, and constraints. We all have some capacity to affect that process, and more important processes than setting an interest rate. Sure, some individuals have disproportionate influence. But social and intellectual movements do happen. The world is not determined by the people who most visibly hold the reigns at any one moment. You’ve participated quite constructively in popularizing an important set of economic ideas. (I was introduced to what convention now calls MMT by you.) You may still find ways to participate constructively.

    Progress may come via funerals, but even that only works if “da youth” get things right. I’m certainly not sure they do. And I’m not sure we can afford to wait for so many funerals. But perhaps you are simply more calm and optimistic than I am.

  41. Travis — (when i play in the comments, i try to respond to ‘most everything, but since yours was addressed to Nick, i’ll leave that to him.)

    beowolf — Mosler is quite a figure. His life choices do represent a great loss to super-villainhood.

    I did not know that what we have come to celebrate as Fed independence in the US came to be as a matter of happenstance rather than design. I think that is a metaphor for most arrangements. Much of social science, and most especially economics, is about rationalizing and sanctifying social affairs that happened to evolve, so we can pretend to ourselves about how much we have designed and chosen, learned and evolved.

    It is quite exciting to read that happenstance might come undone, with respect to the Fed. It’s odd that the President can now unilaterally order assasinations, but he can’t fire heads of his agencies. With respect to the Fed, I’m of the opinion that while some isolation from quotidian shouting matches is quite reasonable, the agency would perform better if its leader had some fear of being fired by an executive branch which is to some degree accountable for employment and median welfare. Under current arrangements, the people a Fed chair has to fear are only the people with large bank accounts.

    Thanks for calling attention to this, both the history and current controversy. I had no idea.

  42. Ramanan writes:

    SRW, (April 12th, 2012 at 10:11 pm)

    Agreed – although I may say this differently because of the manner of stressing. The world is just too globally imbalanced. The United States’s problem is its trade deficit and it has limited fiscal space because any expansion will bring back the current account deficits of 6% and more keeping the world on an unsustainable path. Most debtor nations have limited fiscal space and the creditor nations won’t adjust. One has to convince the surplus nations to expand and failing which it is difficult for deficit nations to expand (i.e., they have to exit out at some point so they don’t even start – leaving some fiscal room for the worst case). My understanding on trade are around managed trade rather than free trade.

    There’s just too much bargaining which needs to be done.

    In general, I think economists are just arguing among themselves and have lost all lines of communication with the policy makers. Christine Lagarde seems to understand the imbalances and is trying to push some ideas but I think when she drops in words such fiscal sustainability without being specific, she simply loses whatever she is trying to say.

    Joe Stiglitz and Paul Davidson talked on these related issues on INET – which you may have heard of (won’t be surprised if you are attending that one – ?).

  43. Dan Kervick writes:

    SRW and all, do we really need a central bank to act like a judiciary and possess the independence of a judiciary? Equal justice needs political impartiality and a certain amount of aloofness. But why should monetary authority be political and impartial? Isn’t monetary authority something more like taxing authority and spending authority, a sphere of social choice that should be a matter for public debate and democratic decision? People will make a lot of bad choices, but a more broad-based and engaged public debate will be healthy for public understanding of economics, and will have spillover effects on many other areas of democratic debate.

    One result would be to move more of these monetary policy debates out of both the blogosphere and the ivory tower, where a few thousand frustrated people with lots of ideas but no vote seem to be engaged in a non-stop daily effort to petition the autocratic prince of the monetary realm to make the decisions they would prefer, and move them into other areas of the public sphere. Scott Sumner could take his show on the road and spread the message, “Tell your representative to vote Yes on NGDP level targeting today!” This change might have the salutary effort of forcing people to explain in more generally accessible language how their various proposals are supposed to work.

  44. Morgan Warstler writes:

    Oh you say you want a grand policy compromise, but that’s bullshit.

    The liberal bias preferring laziness over everyone has to work, and of wanting to pretend that technocrats are just like investors best proves itself in the Job Guarantee.

    As Dan is fully aware, I have dwarfed all on this front with my Paypal / Ebay model of a Guaranteed Income (and Auction the Unemployed).

    And BTW, it has the full support of Sumner’s MM, so winterspeak is wrong on that front as well.

    What people are worth if the private global market is not the same thing as what we as a society want everyone to have to live on.

    IF you really want to make sure everyone has the income they need, then to win your opposition over, you form a GRAND COMPROMISE:

    1. We give everyone who wished to work a Guaranteed Income deposited a la every Friday (think $240 per week).

    2. We auction the work week of all recipients on the private market starting at $40 per week.

    Expect 30M people to participate.

    All upside.

    And that is we give America the For Profit Job Guarantee.

  45. Travis writes:

    Dear Steve Randy Waldman,

    I take the silly idea of democratic accountability very seriously, more seriously than most economists take the silly theory of comparative advantage. Thus it is really an obfuscating move to call accountability to a target accountability. Democratic accountability means being able to hold one’s representatives accountable to the will of the people. The central bank is part of the formal apparatus of the state (in Canada and the UK) and it should be accountable to the people as it is the peoples’ institution.

    I have little time for the argument that the legislature is too slow and cumbersome to do effective fiscal policy. All we would need is a list kept at the municipal, provincial and federal level of needed public works which cover almost every sector of the economy. It would not take much imagination to figure how to get the projects to get citizens and capital back to work within three months of a recession. And given they would be project based the stimulus would terminate with the finish of the project. So a little planning (oh shit I said planning) and a little foresight is all that is required. If the US political system is too dysfunctional to bad for them.

    But here too, liberal (classical and reformist strains) economists could be calling for policies that would make the US political system more functional. Considerations of political rent seeking alone should be motivating all stripes of neoclassicals to be calling for a systematic reform of campaign financing and strong codes of ethical conduct in the US.

    Moreover, it is simply flabbergasting, flabbergasting, that this whole conversation is only occurring because of the Great Financial Crisis which was an epic market failure fuelled by failed central bank policy, control fraud enabled my regulatory capture and deregulation. All on such a massive scale it dwarfs the inefficiencies of parliaments. There, then, is some good deal of irony in the fact that it was unaccountable central banks which serve the private interest of capital in general and the corrupted (by private interests) legislative and executive branches of the US government that enabled this crisis. It is further a great tragedy that the two party system (much coveted by many conservatives in Canada) has effectively made it so that the American public can not hold their politicians accountable all while the the self same politicians dreamt up the most regressive ways to keep the financial markets afloat with citizens money. This tragedy then appeared as farce when workers like garbage workers in Toronto and school teachers in Wisconsin were forced to pay for a crisis they did not cause, by a political system they can’t possibly hold responsible or accountable in large part because of a private markets makes best and state failure ideology promulgated by the mainstream of the economics profession since 1980 what what.

    I will just conclude by saying that engaging in such a dim view of democracy and the principal of accountability and parliamentary responsibility is only fitting of would be technocrats that don’t have a sufficient moral compass as to be trusted with the public good. As such, I will bang my drum for more accountability not less.

  46. [...] title: I am very rude in comments.  PS you need to click the link to get the full [...]

  47. K writes:

    Morgan: I don’t see how your idea is going to work. The Nash equilibrium is you pretend to offer me a job, I pretend to work, I pay you a cut of my guaranteed income equal to the expected cost to you of getting caught for fraud. And the government hires lots workers to run around making sure I’m doing something “useful” for you. “I” in this case am some random slacker, and “you” are whoever has the lowest disutility for going to jail for fraud. That just sucks!

    I don’t like the Job Guarantee either. Personally I prefer a flat tax plus an unconditional citizen’s dividend. 1) No government spies required, 2) I’m not wasting my time pretending to be doing something useful for you, and 3) low effective marginal tax rates for poor people which is the best possible incentive to be productive.

  48. Morgan Warstler writes:

    I’m more than comfy with your hypothesis. Mine is fuzzy, just like Ebay to fix this stuff without investigation.

    Start with this though, those drug dealers who operate mean enforcement mechanisms are some of the guys doing the hiring in my system. They are the ones surrounded by local excess capacity, and they have ability to not just bid, but get RESULTS from their employees.

    I’m calling that upside to my plan. Professional drug dealers are entrepreneurs, the management job requires WORK and personal drive, and this program essentially bribes them to go legit.

    —–

    But let’s think through fraud not in this environment…

    We end up with you getting $240 from govt. Me giving govt. $40, and then say you splitting $200 remaining with me.

    Criminal enterprise. You make $100. I make $100.

    EXCEPT, in swoops US tele-marketing firm(s) and offers $80 across the board for you and ALL the others who I have cut deals with – now I have to pay $100, you get $290, and have to give me $145, OR you just take refuse the telemarketing work and bells go off.

    You get a note requiring you to take before and after pictures of work I’m doing. I get a note, this happened with 3 of my “employees” and a flag has been raised.

    This week, tax payers are now out $190 instead of $200. And WHO has interest in busting us? Tele-marketer. The one getting screwed out of putting you to work.

    Remember that. We don’t just have computer programs sifting through false claims (Netflix prize anyone?), we have interested parties invoking just enough effort to chase the marginal thief back into real work.

    Then we put Food Stamps in our program, heating assistance, and Section 8, and medicaid.

    All form of Govt. aid. Anyone who can work, even from home, has to register.

    Now we’ve increase the mental penalty – cheat the system, and literally ALL YOUR AID hangs in the balance, not just that $100 or $90 check.

    A few dead squirrels hung in the tree chases all the other squirrels away.

    Where do we get cheap labor to make sure we don’t have disability frauds via small prizes to for-profits for fraud paparazzi proving fraud? In our pool, hired by entrepreneurs.

    ——

    Again, the goal is NOT to catch all fraud, the goal is to minimize it without hiring pensioned and well paid public employees.

  49. Morgan Warstler writes:

    BTW, I’d love to see drugs legalized, it would further my plan.

    You just need to think through the effects of GREEDY entrepreneurs want to buy cheap labor. They will be attacking my and yours criminal enterprise with gusto.

  50. Morgan Warstler writes:

    This is Juan Williams explaining the barrier to any kind of system but mine:

    “—White fear of the increasing voting power of Hispanics, Asians and blacks. In the GOP primaries, the nation’s first black president was labeled as the “food stamp president.” He was charged with being a “socialist” and wanting to lead the country to become an “entitlement society.” This racially provocative language suggested hard-working white people being ripped off by lazy minorities. The experts see it a warning sign of the approaching racial storm.”

    http://thehill.com/opinion/columnists/juan-williams/221563-how-race-may-affect-this-years-election

    There is a real compromise here, whats amazing is WHY and HOW so many economists are missing such a simple and elegant solution to our unemployed.

  51. Dan Kervick writes:

    Morgan, the phenomenon you describe is very real. But it is going to be rendered moot in short order by demographic changes. The Tea Party might as well have been called “The Last Hurrah”. It’s already over as they can’t even win in their own party. They’re in no position to be offering any cultural grand bargains.

  52. beowulf writes:

    “As Dan is fully aware, I have dwarfed all on this front with my Paypal / Ebay model of a Guaranteed Income (and Auction the Unemployed).
    And BTW, it has the full support of Sumner’s MM, so winterspeak is wrong on that front as well.”

    I’m no fan of a JG but if that’s what you want, Morgan’s approach really is the only feasible way (politically or operationally) to enact it.

    I’ve explained this to hardcore MMTers before but, as you can see above above, they have a certain reluctance to embracing Morgan Monetary Theory.

  53. [...] 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 an [...]

  54. stickers writes:

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    [...]interfluidity » A note on model risk, policy design, and political alliances[...]…

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    [...]interfluidity » A note on model risk, policy design, and political alliances[...]…

  56. Mike Sax writes:

    Interesting post Steve. At this stage of the game I would probably call myself something of a Post Keynesian too. I think it’s wrong to say either as MM does that fsical policy doesn’t work or is not appropriate though-while I agree with the MMTers on a lot of things-it is also wrong to say that monetary policy doesn’t work.

    I thik the reality is that the two aim at different targets. As I have come to see it from reading Minskys’s analysis of the 1975 recession-according to him we would have had an depression if not for stimlus both fiscal and monetary-that monetary policy largely focues on the financial economy-that is after all it’s reason for being, giving the banking system stability-while fiscal policy is mostly about the real economy.

    So how much of each kind of stimulus do you need? That depends on the nature of the crisis and what your ojbective is in fixing it. Not to quote Trostky but “the means flow from the ends.”

  57. Trixie writes:

    Beowulf says: I’ve explained this to hardcore MMTers before but, as you can see above above, they have a certain reluctance to embracing Morgan Monetary Theory.

    Give your ignored comrade a voice at MMR if you’re so concerned. Why complain about it when you can do something about it? Let him shout his views at the highest of mountain tops ($$$). You know, “balance”.