Haitao Zhang’s macro stabilization proposal

I first “met” Haitao Zhang seven or eight ago, when we were both frequent commenters at Brad Setser’s remarkable blog. After I wrote about NGDP targeting, Zhang forwarded to me a paper he composed and sent around several years ago. He has graciously given me permission to republish it.

It’s an interesting piece, in the spirit of a several proposals (Abbott, Parameswaran, TradersCrucible, me) that try to combine the benefits of fiscal policy with the institutional agility and rule-orientation associated with monetary policy. Zhang’s proposal is a particularly creative and ambitious contribution.

From the abstract:

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

Read the whole thing!

P.S. Scott Sumner, the Timothy Leary of NGDP targeting, seems to have endorsed the Abbott paper. If so, there is a lot less daylight than I thought between his views and my own. Which is a shame — he’s fun to argue with!

Update History:

  • 2-Feb-2012, 7:00 p.m. EST: Added TradersCrucible’s TC rule to the list of rule-oriented fiscal policy proposals.

26 Responses to “Haitao Zhang’s macro stabilization proposal”

  1. Haitao writes:

    Steve, thanks for publishing my essay from three years ago.

    For the sake of completeness, here are some of the comments accompanying the proposal when I first sent it out:

    “It seems obvious that a variable budget of public spending could compensate for fluctuations in private demand. I assume that the reason it is not done is because of political difficulty — that is, it is a lot harder to withdraw than to initiate public spending to make it truly variable; also the political debate on the need to spend and how to allocate the spending could make fiscal stimulus sluggish and ineffective. However with the Internet this no longer has to be the case. My idea is that we can formulaically determine the total amount of fiscal reponse needed at any given time (so it is truly variable) and through an electronic national marketplace voters can directly control where the spending should go to. On this marketplace voters can direct their share of the variable public spending and public/private entities can bid for the spending with proposals. This way the spending can be speedy, truly variable and politically palatable. If this approach proves sucessful we may be able to get the central bank out of the role of stimulating aggregate demand through monetary policy and hopefully get out of the boom and bust cycles in asset pricing.”

    And from a recent email exchange with Steve on the idea with emphasis on comparison to transfer payments and also on more general application of a voter market:

    “A transfer payment scheme may be better at maximizing some utility function that incorporates higher morality than the current world has. It certainly has less make-work flavor to it. However we do live in a world where most people derive their sense of well-being relative to others. Therefore people can get really worked up if they think others are getting their cuts undeservingly. On the other hand if we give the stimulus dollars indiscriminately we have the problem of less spending propensity and less GDP multiplier effect, …… With the advance of automation, maybe one day we have no other reasonable choice than transfer payments. Maybe we will eventually reach a Star Trek age (at least the physically plausible part).”

    “The beauty of the variable spending budget through an electronic market is that you can incorporate a transfer payment aspect to it. You could allow people in distress to plead for help in the market, for example. So long as the propensity to spend can be verified, the net effect in achieving the GDP target is the same. This way you match demand and supply: some voters have to be moved by the story and feel satisfied in how the money is spent; and hopefully some real needs are met. In my additional thoughts section I used elective surgery as an example, just to be provocative. (I have to say though that aid to debtors in distress will probably end up in the pockets of creditors who don’t have high propensity to spend — so this deserves more thought. Maximizing the GDP multiplier through vetting of propensity to spend is important as it minimizes the size of the program to achieve the desired effect and makes it more palatable). My one unstated constraint — as a hidden morality booster and as a necessity to keep this program a variable one — is that you shouldn’t be able to vote for something that you personally list in the marketplace. Spending other people’s money to benefit others: maybe that is how we can finally break the paradox of thrift!”

    “Yes a voter market can be a mechanism independent of being an economics stabilizer. I am being practical in recognizing that control of the budget is real political power and I don’t think politicians will willingly give up that power and also some form of representative democracy (as opposed to voter direct control of everything) is probably a necessity. On the other hand the stimulus budget could be the hot potato that they will be happy to pass on to others, judging from what happened recently.”

    “It’s the feedback control aspect of the scheme that makes things robust and flexible. Other economic stabilizers (unemployment insurance, aids to states) can be automatically accomodated and voters will just be happy that they have less work to do (as spending money in this market is work). The fact that the voters are just as happy to not do this is what plausibly makes it truly variable and therefore sustainable.”

  2. Lennyh4747 writes:

    Is this after we balance the budget?

  3. Tim Leary?? I hope that’s just an affectionate nose tweak for Sumner, cause boy Leary was one of the all-time miserable slimeballs. If not I suppose we can expect a galloping moral panic, a government anti-NGDP targeting propaganda campaign, and a crackdown on all related research for a generation.

    Though it is fun to imagine some slogans in that vein.

  4. JKH writes:

    As a variant of “NGDP targeting”, this version is opposite to the popularized one – using fiscal rather than monetary policy.

    “NGDP targeting” is an upside down idea. The primary policy choice is the mix of fiscal and monetary policy used to aim at the target. The secondary choice is the target itself.

    “NGDP targeting” isn’t a policy. It’s a dial within a policy.

    Zhang’s policy, being highly fiscal in emphasis, is closer to MMT, than to the popular version of “NGDP targeting”.

    Technical tinkering in the form of internet policy voting is reminiscent of technical tinkering in the form of open labour market operations as per the MMT employer of last resort. Both are mechanizations.

    The Abbott proposal is a mechanized fiscal policy, although that’s not understood by the author. He’s mistaking the institution (the central bank) for the classifier of policy.

  5. Ryan — I’m kind of shell-shocked of giving offense, so I want to be clear that by “Timothy Leary of NGDP targeting”, I’m referring to Timothy Leary in the sense of “crusading popularizer from the fringe”. There is a taunt in the analogy, as implicitly I’m comparing NGDP-targeting to LSD, and Timothy Leary had something of a pied-piper reputation. But it is intended as a gentle and affectionate taunt.

    Though it’s obvious that Timothy Leary was not an effective advocate for LSD (cf the backlash to his popularization that you cite), I don’t know his biography well enough to judge him a slimeball, and would not imply that of Sumner, whom I like a great deal. (I don’t consider advocacy of psychedelic use at all evidence of slimeball-hood, although my sense is that Leary’s advocacy was too indiscriminate and incautious. But again, I don’t have a strong moral view of Timothy Leary in either direction.)

  6. Detroit Dan writes:

    Thanks JKH (as always)…

  7. Sandrew writes:

    In the US, this proposal would require either a constitutional amendment (to overcome bicameralism and presentment requirements; Art. I, sec. 7), or a major jurisprudential shift of the SCOUTS, or both. See INS v. Chadha; Bowhser v. Synar.

    Sorry for armchair lawyering.

  8. Haitao writes:

    While the central banks already manage “inflation expectation” I proposed to additionally manage “expectation of aggregate income” through NGDP targeting. The NGDP argument section strove to show that the two managed expectations are not in conflict with each other. Will a managed “expectation of aggregate income” prevent depression economics from recurring? Keynes would likely say yes. Can it be done at lesser cost than other policy tools? If your utility function is to maximize the choices of the citizenry then the voter market proposed is more than just a mechanism. Yes the proposal does preclude the accumulation of financial claims (savings) as a direct choice, but that constraint is precisely limited and is also precisely the point.

    How operationally useful is a managed “expectation of aggregate income”? If I were a banker and I needed to justify to my regulators about my loan portfolio performance expectation then the “expectation of aggregate income” would certainly be a critical input to my model. For proof we can look at the “stress test” models that the SIFI banks have to use and the kind of assumptions they have to make. Is it critical to standard budgeting decisions of ordinary businesses? I strongly suspect that the answer is yes, implicitly if not explicitly.

    I don’t know if this makes me MMT.

  9. Haitao writes:

    Thanks for your very valid point. I am not a lawyer but if the interstate commerce clause can be used to create a federal health insurance mandate then I suspect that the U.S. constitutional framework is flexible enough to find accommodation for the proposed scheme.
    Also the proposal may be even more relevant to the high savings-rate countries.

  10. JKH writes:


    My comment was a quick note on what I saw as a set of connections between 4 different ideas – your proposal, the Abbott proposal, the Scott Sumner version of NGDP targeting, and MMT.

    It was more of a quick note to myself, which is a piss poor excuse for making a comment on somebody’s else’s blog, particularly with a guest post.

    I haven’t spent the time on your proposal that I’d like to, but implicit in my comment was the impression that it constitutes a very coherent argument for both NGDP targeting, and using fiscal policy for achieving the target. As such it was balanced. I have not personally found the monetary policy version of NGDP targeting to demonstrate similar coherence or balance.

    Any connection to MMT is distant, but overlapping in its strong preference for fiscal policy over monetary policy.

    I would have to spend more time thinking through your fiscal mechanism proposal, so I shouldn’t have inferred any criticism of it. Sorry if I did so.

  11. TC writes:


    Great essay. It reads like something from 100 years in the future where people are vastly more intelligent.

    The allocation of unvoted funds is a bit of a problem as you note.

    How about allowing “parties” to form where someone can vote for a platform, and that allocates the money according to the platform. Then, within geographic locations, teh system could allocate unvoted funds along the lines of voted funds.

    So within a congressional district (example only), the unvoted funds would then allocate in percentages along the lines of the voted funds. Say party 1,2,3,4 got 20%, 15%, 10%, 5% The remaining 50% of the unvoted funds would then allocate along the lines of these same percentages, so the final votes would be 40%, 30%, 20%, 10%.

    Just a thought.

    You can’t be MMT because MMT is a very specific set of policy proposals.

    I haven’t gone through the focus on fiscal vs. monetary, but JKH is 100% correct about NGDP target being a choice of dial setting and not a policy.

    This is a huge point “that is, the trust in the unit of transaction,” We make a fetish of inflation, but what we’re concerned about is contracts and transactions. Money is the tool to get these contracts and transactions done.

    For this, the absolute level of inflation is far less important than the volatility of inflation. If we had 100% inflation with zero variance in inflation, we could make contracts, investments and transactions with complete confidence. It’s something to keep in mind as we go forward.

  12. Bill writes:

    Another imaginative scheme that completely ignores the physics and reality of finite supply and declining input fossil fuel energy, which makes it a waste of time. Sorry, but until planners and economists wake up to the in-elasticity in the available Joule supply and get over the assumption that alternatives equal in portability and energy density with oil do not exist and there won’t be substituted as oil production declines, treatises such as this are irrelevant.

  13. beowulf writes:

    “The beauty of the variable spending budget through an electronic market is that you can incorporate a transfer payment aspect to it. You could allow people in distress to plead for help in the market, for example.”

    The Queen for a Day macro stabilization plan.

    “The interview would climax with Bailey asking the contestant what she needed most and why she wanted to win the title of Queen for a Day. Often the request was for medical care or therapeutic equipment to help a chronically ill child, but sometimes it was as simple as the need for a hearing aid, a new washing machine, or a refrigerator. Many women broke down sobbing as they described their plights, and Bailey was always quick to comfort them and offer a clean white handkerchief to dry their eyes.
    The harsher the circumstances under which the contestant labored, the likelier the studio audience was to ring the applause meter’s highest level. The winner, to the musical accompaniment of “Pomp and Circumstance”, would be draped in a sable-trimmed red velvet robe, given a glittering jeweled crown to wear, placed on a velvet-upholstered throne, and handed a dozen long-stemmed roses to hold as she wept, often uncontrollably, while her list of prizes was announced.”


    A variable payroll tax rate (adjusted every quarter inversely with unemployment rate) would be simpler, if perhaps less entertaining/degrading. As for Sandrew’s legal objections, Congress can set the tax holiday formula, leaving it to the Secretary of the Treasury to do the math. That’s pretty much how entitlement programs auto-spend without new appropriation bills every year.

  14. beowulf writes:

    Beyond that, I think SAndrew’s legal objections to the Queen for a Day market are well taken.
    I don’t think Congress could write a appropriations formula so… flexible, that Tsy could write checks per the wishes of the live studio audience without tripping several constitutional obstacles.

    But if there’s a will there’s a way. I suppose Congress could give a 100% tax credit for whatever a taxpayer donates to a PRIVATE Queen for a Day market (wonder if NBC still owns the trademark), Fiscally the same thing but with the added advantage of being legal. Again, its easier to periodically adjust the existing the payroll tax holiday.

  15. beowulf writes:

    Abbott’s proposal is interesting, but entirely too complicated. Instead of the Fed paying a rebate on every sales tax transaction (since sales taxes vary by state, county and city, there’s a lot of moving parts), why not just levy and adjust a transaction fee on everything that moves through the FRS? The Fed governors don’t even need to change the law to do that (12 USC 248A Pricing of Services).

    Of course this doesn’t add a penny to tax receipts (only Congress can levy taxes). On the other hand, Fed net earnings are rebated to Tsy budget as miscellenous receipt. The phrase “no taxation without representation” doesn’t have the word miscellenous in it, does it?

  16. Dan Kervick writes:

    I think this is a step in the right direction away from monetarist, central-bank oriented macroeconomic policy regimes and toward a re-empowered fiscal policy regime. If you’re going to target a spending level, its best to do it with some actual spending, and not just financial asset swaps and central banker tune-calling, expectations-massaging, and exhortations.

    I wonder about this part:

    “The national Treasury should be authorized to automatically borrow or draw from a reserve fund (these actions are outside of the regular budget) to create the necessary amount in an aggregate spending account.”

    Why a reserve fund? It seems to me that the more direct way to go with this kind of automatic stabilization and aggregate demand support is to authorize the central bank to directly credit the treasury’s accounts by the shortfall between the expected spending level and the target spending level. As aggregate demand returns, the size of the direct credits goes down automatically. This is what it means to move away from CB-driven “quantitative easing” to actual helicopter drops. No extra treasury borrowing, no extra taxes. Just pure, fresh-baked fiat cash as needed and appropriate given macroeconomic conditions.

    I’m not sure about the electronic aspect. It sounds to me like a process that could be easily gamed and manipulated by sharpies to produce concentrated private windfalls not in the public interest.

    There are certain kinds of jobs that always need to be done, including various kinds of education. I would propose a dramatic expansion of public education to include various forms of periodic adult education across the lifetime. Almost everyone has some skill or specialized knowledge they can teach to somebody. During good times, organize and train a mass army of citizen educators – sort of like the National Guard, but armed with books and computers, not guns. Everybody is required to put in their time to receive this training and practice it. Then during recessions, “call up the reserves” and pay the unemployed as well as cadres of more highly-trained “officers”, to get to work educating themselves and other unemployed and underemployed Americans. Pay the educators to do this work, which will immediately boost spending and demand, while at the same time improving the skill level of the unemployed so that they are prepared to be re-absorbed into the private sector economy as it expands again.

    The education should be going on all the time. Employers should be required to provide paid furloughs to their employees on a periodic basis – maybe every five years – so that they can do some teaching and learning. But the program would automatically ramp up and down countercyclically as part of a macroeconomic stabilization regime.

  17. […] Waldman is – of course – the smartest and has assembled a list of the interesting proposals, including the remarkable proposal featured in his post. He was gracious enough to include the TC […]

  18. Philip Pilkington writes:

    “In this essay I propose that the central bank be freed from its role of using interest rate policy to support aggregate demand. Instead, a truly variable public spending program is suggested to regulate aggregate demand. The program should be running constantly in order to minimize the time delay of fiscal responses.”

    Woah! This ain’t Sumner’s proposal. Sumner thinks that monetary policy generates magic little men that raise AD and inflation no matter what the circumstances. It’s based, as far as I can see, on a starry-eyed version of Friedman’s already extremely dubious monetarism.

    Monetarists, no matter what their stripes, distrust fiscal policy. Usually for ideological reasons, as far as I can see. But also for technocratic reasons. If monetary policy worked in the way they thought it did, the economist-king would be an imaginable entity. And that, I think, appeals to the narcissism of many an economist. Fiscal policy is the domain of ragtag populists and leery political types.

  19. RN writes:


    Highly agree.

  20. Haitao writes:

    Thanks for your exceedingly polite response and I am sorry for mangling your handle in my previous reply.
    Thanks. I think the market can aggregate on the demand side through larger project proposals so the “parties” are already there?
    Your criticism on degradation is well taken. My point is that a market is good at matching demand with supply, so that demand for transfer payments and voters who support transfer payments can be matched in a voter market and in the meantime hopefully generates less animosity among those who are against the idea. That is why I said “A transfer payment scheme may be better at maximizing some utility function that incorporates higher morality than the current world has.” I didn’t mean that the transfer has to be degrading though I admit that market competition may lead to that kind of posture.

    It is true that there are many alternatives and some like transfer payments may be simpler to implement. I would compare proposals along two axes: 1) Efficiency/cost: Larger GDP multipliers and smaller delays are better because they require smaller interventions to achieve the same level of effectiveness. 2) Sustainability: Different voters have different priorities and some harbor strong antipathy towards certain things. Stimulus spending also needs to be easily withdrawn to be truly variable.
    More efficient/less costly programs are likely more sustainable, which in turn means they are more credible with private actors we want to influence, which in turn means there is less need for stimulus and thus it is a virtuous cycle. So efficiency/cost is critical to long term program success.
    Good points were made about the legal viability of my proposal. I am not a legal scholar and don’t have a ready answer on that aspect.

    The focus on nominal finance does not intend to constrain in any way the real economy from adjusting to real supply issues.

  21. […] el mismo resumen que cita interfluidity: From the abstract:In this essay I propose that the central bank be freed from its […]

  22. winterspeak writes:

    JKH: Your comments were right on.

    Zhang, by putting fiscal front and center, is much closer to MMT than to monetarism, whether it be Sumner’s flavor or any other.

    I cannot logically see why NGDP is the target, and not some combination of employment and inflation. Maybe it’s a monetarist hangover? If employment was directly targeted, then it’s very close to MMT ELR ideas.

    Finally, the posture towards fiscal is very unbalanced, as it only looks at net private savings (equity) additions via spending, not increasing deficit by reducing drains (taxes). Clearly sectoral balances are not understood.

  23. winterspeak writes:


    question for you.

    in an economy with large taxes, why not transfer money from the public sector to the private sector via taking away less money from the private sector (via taxes) in the first place?

    taxes can go up and down in response to an NGDP target. We’ve seen that the payroll tax, for example, can be quite flexible.

  24. winterspeak:

    Because people whose taxes you cut may not spend the tax savings. Only if the government spends it directly are we guaranteed a rise in aggregate demand.

    The problem of tax savings not being spent is especially acute in a liquidity trap.

    You can partly correct for this by targeting the tax cut to the poor (if necessary to the point of making the tax quite negative). The poor spend more out of their tax cuts than the rich do.

    Note that, in a liquidity trap, even if you do make this correction, you must also take care not to over-stimulate the supply of labor. It’s already high in relation to labor demand. So target the poor but don’t do it through the income tax. This notion (“the paradox of toil”) comes up in an Eggertson and Krugman paper summarized in http://www.voxeu.org/index.php?q=node/5823.

  25. Haitao writes:

    Genevieve gave a good answer already to your second question. Basically it comes down to the propensity to spend vs save, which changes the GDP multiplier and the efficiency of the program, which changes the size of the stimulus needed, which changes the political viability. You likely need negative taxes (transfer payments) to get a good sized stimulus, which may be politically difficult. If the program is not credible with the private sector then extra stimulus may be needed which further reduces its credibility and effectiveness, so on and so forth.

    The question of NGDP targeting should be understood in the context of the national income to see that it is not an arbitrary target. NGDP targeting stabilizes nominal national income, which in turn stabilizes private finances at the macro level since private sector solvency is dependent on private income projections. Inflation is not a causal factor in this context once you fix the income variable. Unemployment is a good proxy but you run into complications of labor participation rate, average wage etc.

    Genevieve, Dan Kervick,

    With regard to frauds and manipulations by the rich I would look at it from the angle of voter expectations. If a project meets a voter’s expectation then that voter should be satisfied. If it doesn’t then the voter’s support for the program may be reduced in the future. If voter satisfaction is generally low the long term viability of the program is then in doubt. I think in general the market mechanism to address such issues is through estalishing reputation/trust of sellers (project sponsors). It may require some policing for smaller, non-repeat sellers, but here in general markets can also create the necessary intermediaries when needed: for example transfer payments can be aggregated through trusted charities or local governments, escrow accounts can be used to ensure funds are spent as intended etc. In the long term market competition among sellers should in general promote buyer/voter satisfaction and reduce transactional cost, or at least do a better job than any other approach.

  26. Haitao writes:

    Re: balance between fiscal and monetary policies

    The proposal is that an effective fiscal policy be used to stabilize the nominal economy. The gives the monetary policy more freedom to manage inflation expectation, address debt leverage, asset pricing, and in general intermediate the balance between consumption and investment.