Let me know when our critics respond to our actual ideas
One of the things that makes me believe that we are on the right track is that our Keynesian critics seem unable or unwilling to respond to actual market monetarist arguments, particularly regarding monetary offset of fiscal austerity. Marcus Nunes directed me to another example, this time from Robert Waldmann at Angry Bear:
In any case, Japanese inflation expectations appear to have been successfully managed and to have caused higher output (including construction) as should be the result of the resulting reduced expected real interest rates. It is important to note that the extremely radical expansionary monetary policy was not enough to prevent a recession starting Spring 2014 following a 3% increase in the value added tax. Monetary policy at the ZLB isn’t helpless, but it can be overwhelmed by fiscal policy. The assertion that a sufficiently determined monetary authority can target nominal GDP has been pretty much disproven (again).
This is wrong on so many levels one hardly knows where to begin:
1. Neither the Japanese government nor any other government that I am aware of has ever targeted NGDP. More importantly, they have never done level targeting of NGDP, which is what everyone from Christina Romer to Michael Woodford to various market monetarists have advocated. (At the zero bound, level targeting is far more powerful than growth rate targeting.) How a policy that has never been tried has failed, is beyond my comprehension.
2. Yes, the BOJ did establish a 2% inflation target. FWIW the Japanese inflation rate in 2014 was 2.4%. In fairness to Waldmann, that was partly due to the sales tax increase, it was running at 1.6% before the tax increase, and will likely fall below 2% this year. Still, it’s better than deflation. If Abenomics turned deflation into inflation, why not do even more? As far as I know Japan has not run out of ink and paper.
3. Japan did experience two quarters of falling RGDP in 2014, but (despite press reports to the contrary) certainly did not experience a recession. Or if it did, it would be the first recession year in human history associated with a significant fall in the unemployment rate. If we could have a “recession” that brought down our unemployment rate to 3.4%, I’d be thrilled.
4. Of course what actually happened is that RGDP soared in Q1 and then fell sharply in Q2, and a bit more in Q3. This is what roughly I expected, and is completely consistent with the monetary offset model. Waldmann seems to think that the fact that the Japanese public is smart enough to move April auto purchases up to March in order to avoid the hefty sales tax increase is inconsistent with our model (which incorporates rational expectation and efficient markets.) Monetary policy is not a surgical tool that can move AD from one month to the next.
5. In any case, monetary offset refers to the fact that the central bank will prevent a negative demand shock on the fiscal side from reducing inflation below target. But this tax increase was a negative supply shock that increased inflation. I’ve consistently argued that if a central bank is targeting inflation then a fiscal action that affects aggregate supply (like a employer-side tax cut or a VAT cut), may impact real GDP without impacting inflation. Monetary offset does not apply in that case.
6. And since when is a monetary policy that leads to only 2.4% inflation considered “extremely radical expansionary monetary policy”? I mean seriously, what is so radical about a government swapping one risk-free near-zero interest rate government liability (reserves) with another risk-free near-zero interest rate government liability (government bonds)?
7. And what does the phrase “sufficiently determined” mean? The recent stimulus passed by a 5-4 vote. That doesn’t seem very determined to me. There was one quite determined stimulus advocate at the BOJ, but that hardly makes the overall BOJ sufficiently determined. If we assume they fell a bit short of their inflation target (stripping the VAT out of the inflation rate), then obviously they were not sufficiently determined. Now if someone wants to argue that conservative central bankers are not likely to be sufficiently determined at the zero bound, you’ll get no argument from me.
Meanwhile Paul Krugman continues to complain about critics of fiscal stimulus, without actually responding to our criticisms.
In another post he addresses the challenges faced by Greece:
Now, you might think that 3 percent of GDP is not that big a deal (although try finding $500 billion a year of spending cuts in the United States!)
It just so happens that the US budget deficit declined by $500 billion in calendar year (not fiscal year) 2013 compared to calendar year 2012. And we all know what happened . . . er, didn’t happen.
On the positive side, Krugman’s recent post on high tech firms is excellent.
Tags:
14. February 2015 at 20:56
How did QE generate inflation if people only perceived the money expansion from QE to be temporary?
14. February 2015 at 20:59
The U.S. budget deficit declined because revenues increased.
Spending, either in real or nominal terms, did not fall; in fact, it increased.
Greece needs actual cuts and even if they were to trigger inflation, those cuts would be real to a lot of people.
…
I think if you want people to engage your NGDP targeting idea, you need to be more specific about the actual policy steps. ‘Targeting’ sounds both vague and overly optimistic. It’s like ‘targeting’ employment — sounds nice, but how do you do it, and *can* you do it.
14. February 2015 at 21:03
“And since when is a monetary policy that leads to only 2.4% inflation considered “extremely radical expansionary monetary policy”?”
Since we live in a world where market forces might make prices fall by 10%. A price inflation of 2.4% would very much be consistent with “extremely radical expansionary monetary policy” in this case because of the extremely radical expansion in OMOs.
“I mean seriously, what is so radical about a government swapping one risk-free near-zero interest rate government liability (reserves) with another risk-free near-zero interest rate government liability (government bonds)?”
One is money, the other is not, obviously. One is a creation of new “near zero interest rate liability” out of thin air while the other is created endogenously and subject to market forces, as hampered as they are.
It isn’t a mere “swap”. New money is coming into existence.
14. February 2015 at 21:07
level targeting is far more powerful than growth rate targeting
Sorry, dumb question — the main difference is that level targeting takes past years into account?
15. February 2015 at 00:00
A critic who responds to our actual ideas: Yichuan Wang has some words of warning for Scott Sumner (also check out his amusing new post on the mating market, on the same site): https://medium.com/@yichuanw/the-problem-with-musical-chairs-27ec201fa206
15. February 2015 at 03:54
“Let me know when our critics respond to our actual ideas”? There’s an easy answer to that. Speaking as a Keynsian, “let me know what market monetarists respond the the actual responses that Keynsians have made to market monetarists’ so-called ideas”.
Take monetary offset for example. I’ve “responded” to that daft idea several times, but I’ve seen no coherent response from market monetarists. Anyway, I’ll run through the flaw in “offset” for the umpteenth time.
First, I take monetary offset to be the idea that fiscal stimulus is pointless because the central bank will just counteract or “offset” any such stimulus. Now the flaw in that idea is DESPERATELY SIMPLE. It’s the fact that if the CB agrees with fiscal authorities that stimulus is needed and thinks that fiscal stimulus is insuffient, then the CB far from “offsetting”, will actually do the OPPOSITE: that is, it will AUGMENT the latter fiscal stimulus, not “offset” it.
In fact we saw the latter phenomenon BIG TIME during the recent crisis. That is, governments implemented SOME fiscal stimulus, but most CBs thought that wasn’t enough, so they augmented that with interest rate cuts.
QED.
15. February 2015 at 05:58
Ralph, MM’s do not claim that central banks always offset fiscal policy in practice.
Rather, “monetary offset” is the idea that any fiscal action’s effect on aggregate demand *could* be fully offset by monetary policy, that the Fed is never impotent. This claim contrasts with Keynesians who claim central bank impotence at the zero lower bound. (Krugman is careful to claim only “conventional” monetary policy impotence at the ZLB. Given that “conventional” monetary policy is interest rate targeting, Krugman is “right” by tautology but wrong in the larger implication).
So you are criticizing an “actual idea” that is not part of market monetarism, which is probably why you haven’t seen a direct rebuttal.
-Ken
Kenneth Duda
Menlo Park, CA
15. February 2015 at 06:02
TallDave:
> Sorry, dumb question “” the main difference is that
> level targeting takes past years into account?
The way I look at it is that level targeting sets a level path in advance: we want NGDP to be $18T the first year, $18.9T the next, $19.845T the next, where the target advances 5% a year. The key to level target is that those level targets do not change. If we miss the target the first year, and are at only $17.5T, then the second year’s target is *still* $18.9T. Likewise, if we overshoot and end up with $19.4T the second year, the third year’s target will still be $19.845T.
Level target is so much better than the conventional growth rate targeting, because (ironically) with level targeting, people can count on the average growth rate, but with growth rate targeting, they can’t. (Look at average inflation over the last six years and tell me how anyone can count on a 2% average inflation rate moving forward.)
Level targeting can be applied to NGDP, or to other things, like the level of PCE. PCE level targeting would be a big improvement over inflation targeting (where “inflation” means PCE growth rate).
-Ken
Kenneth Duda
Menlo Park, CA
15. February 2015 at 06:02
The Nikkei 225 up 25% last 52 weeks. It goes up every time the yen goes down. The BoJ should set a NGDPLT target but maybe also say they like a cheaper yen…the new guy Yutaka Harada is a winner…
15. February 2015 at 06:12
Charlie:
> It’s like ‘targeting’ employment “” sounds
> nice, but how do you do it,
Targeting NGDP is *nothing* like targeting employment. Employment is a real quantity, and is determined by all sorts of real factors including immigration, population growth, productivity, etc. There is no reason to think the Fed can control those things. NGDP is a nominal quantity. It is denominated purely in US dollars, over which the Fed has monopoly control. What possible reason is there to think that the Fed couldn’t hit any nominal target it set its mind to? How about 1000% NGDP growth? Try pegging the dollar to the yen on a 1-for-1 basis, and see what happens to NGDP.
> I think if you want people to engage your NGDP
> targeting idea, you need to be more specific about
> the actual policy steps.
Scott has been pretty specific, e.g. here: http://mercatus.org/publication/market-driven-nominal-gdp-targeting-regime. The basic steps are very simple:
1. tell the market that you are switching to NGDP level targeting
2. tell the market what the level targets are for the next N years
3. tell the market you will do “whatever it takes” to hit those targets, i.e., nothing else will factor into monetary policy.
4. do all of the things the fed does now to target inflation and interest rates (models, OMO’s) but with the NGDP target as the target instead of inflation
That’s a great start. Then, you can make it better as follows:
5. Set up an NGDP prediction market, where traders make money by correctly forecasting NGDP
6. Peg the price of NGDP futures on that market
7. Get rid of the old modeling-and-forecasting apparatus
This is so beautiful it brings a tear to my eye. Once the Fed has outsourced modeling and forecasting to the to the private sector, people like Kevin Erdmann will demolish the government modelers.
The fact that the Fed apparently ignores the market’s inflation forecast (implicit in bond spreads) is just appalling.
-Ken
Kenneth Duda
Menlo Park, CA
15. February 2015 at 06:21
CMA:
> How did QE generate inflation if people only perceived
> the money expansion from QE to be temporary?
Under QE, the monetary base went from $800B to $4T, up by a factor of five. The right was telling us that this would cause 500% inflation. Instead, chained PCE is up maybe 12% (http://research.stlouisfed.org/fred2/series/PCEPI), less than 2% a year. And you are asking why PCE is up less than 2% a year rather than zero when the monetary base quintupled?
Anyway, I think the reason for the specific amount of inflation is that the market believes the Fed has a 2% inflation ceiling and that monetary base expansion is permanent precisely insofar as is needed to stay close to but under that ceiling, i.e., it doesn’t matter very much what the Fed actually does in the present if markets agree on what it will do in the future. i.e., I think we would have seen essentially the same inflation if the Fed had raised the monetary base to $3T or $5T. Note how “tapering” was a total non-event, as was the sequester. Markets are simply assuming that the Fed will do whatever it takes to stay close to but under 2% inflation.
-Ken
15. February 2015 at 06:47
Ralph, one more point on monetary offset. Check out this post:
http://angrybearblog.com/2015/02/the-taper-tantrum.html
where Robert Waldmann describes how he became convinced that the central bank has plenty of ammunition at the ZLB, i.e., that monetary offset is correct, by focusing on Japan.
-Ken
Kenneth Duda
Menlo Park, CA
15. February 2015 at 07:07
CMA, A small portion was expected to be permanent.
Charlie, Greece needs to reduce spending or increase revenue, it makes no difference which they do, at least from the perspective of balancing the budget (obviously in may matter in other ways.) But right now Greece is being pressured to balance their budget.
Be specific about how to target NGDP? You must be new here. Or maybe you are joking, I can’t tell.
TallDave, You target a given trend line, promising to return if you deviate from the line.
Saturos, Yes, I saw that, and you are right it’s a much better post.
Ralph, You said:
“Take monetary offset for example. I’ve “responded” to that daft idea several times, but I’ve seen no coherent response from market monetarists. Anyway, I’ll run through the flaw in “offset” for the umpteenth time.
First, I take monetary offset to be the idea that fiscal stimulus is pointless because the central bank will just counteract or “offset” any such stimulus. Now the flaw in that idea is DESPERATELY SIMPLE. It’s the fact that if the CB agrees with fiscal authorities that stimulus is needed and thinks that fiscal stimulus is insuffient, then the CB far from “offsetting”, will actually do the OPPOSITE: that is, it will AUGMENT the latter fiscal stimulus, not “offset” it.”
I must have 100 posts that respond to the complaint in your second paragraph. I suggest your read them.
Thanks Ken.
15. February 2015 at 10:03
Kenneth Duda,
Thanks for your detailed response (05:58). Your first suggestion as to what Monetary Offset (MO) consists of is the idea that a central bank can always negate fiscal stimulus. Well of course!! CBs can raise interest rates by any amount they like. Has anyone ever suggested otherwise?
To the extent that that’s what MO consists of, the MO idea is as illuminating as saying people can negate their neighbour’s attempt to get to work by slashing their neighbour’s car tyres.
The second element that makes up MO is (according to your comment) that MO contradicts Keynsians’ belief in “central bank impotence at the zero lower bound”. I.e. you’re suggesting that Keynsians claim QE doesn’t work. Well that’s news to me. Where are these Keynsians who claim that QE is totally useless? The consensus far as I can see (adhered to by Keynsians and everyone else) is that while QE has a finite effect, it’s defective in various ways, e.g. it boosts the value of the assets held by the asset rich (as admitted by the Bank of England).
As distinct from your own definition of MO, I assume a more authoritative definition is the one given by the high priest of MO himself, Scott Sumner. He gives a completely different definition to yours. At the link below, he defines MO as the idea that if the CB thinks fiscal stimulus will push inflation above the 2% target, the CB will partially or wholly negate that fiscal stimulus. Well of course (again). Who ever said otherwise (again)? Where are these Keynsians who claim that if inflation is excessive the CB won’t do anything about it?
Far as I can see, MO is one huge non-idea.
At the link below see in particular the paragraph just before and just after the supply / demand diagram.
http://mercatus.org/publication/why-fiscal-multiplier-roughly-zero-0
15. February 2015 at 10:19
Scott,
Thanks for directing me to the “100 posts that respond to the complaint” which I make. You’ll be acquainted with your posts much better than me, so can you suggest one or two for me to look at?
The sheer number of posts is actually part of the problem with market monetarism (at least from my point of view). That is, for anyone trying to get to grips with market monetarism and monetary offset, where do they start? Where do they go for a simple clear definition of terms like “monetary offset”? Even advocates of monetary offset do not seem to be agreed on what it consists of, as I showed in the comment of mine just above.
Incidentally I recently made the same complaint about free banking to George Selgin and he admitted that free bankers need to set out a simple clear explanation of free banking for those looking for an introduction to the idea: something he said he would do as soon as he has time.
15. February 2015 at 10:58
I do not promote what “Keynesians” believe or think as any standard bearer for determining whether or not I “am on the right track.”
If a critic of mine does not engage or respond to an actual idea I have, that does not in the least suggest or show or prove or be evidence of the notion that I am therefore on the right track.
The ground for knowledge of the real world is self-reflection, i.e. Reason, not the extent to which your thoughts are ignored or misunderstood by others.
Market monetarists for example have not actually responded to or engaged the Austrian ideas of individual action and economic calculation. The seeming responses to them consist of evasions, responses to straw man characterizations, and superficial summaries meant to paint them as wrong or misguided for the purposes of politically agitating for market monetarism without an ultimate ground being described or clarified.
But does any of that behavior suggest, or show, or prove, or be evidence of, those ideas being any more correct? Not at all! I do not stoop to such low standards. I do not need to grasp at every straw that I haphazardly feel at the time will promote my ideas. My ideas stand or fall on argument, just like every critic’s ideas stand or fall.
15. February 2015 at 12:00
Ken
You seriously want a system in which traders win money by making correct predictions in a financial casino?!
That sounds as if by creating money that is given to certain ‘winners’ it necessarily makes other existing deposits less valuable.
…
I’m still waiting for some specifics. Telling the market that you will be creating inflation is a non-answer. Tell me how you create inflation. … After all, The Fed has limited power to create money. It doesn’t have a printing press. It has no control of fiscal stimulus. It has some ability to make lending easier, but remember that even then money is created in the private sector.
It can swap reserves for T-bonds from now until forever but that won’t induce inflation.
…
The notion of the Fed as all-powerful institution is the root of much economic fantasy.
There are powerful forces keeping inflation in check — productivity and expansion of the global labor force makes goods cheap and reduces wages. The Fed cannot affect those.
It could, in theory, double the existing money supply and affect nominal money, but tell us how it does that?
15. February 2015 at 13:36
Who is right: Ken Duda or Benjamin Cole?
https://thefaintofheart.wordpress.com/2015/02/14/my-blog-u-ment-with-john-cochrane-or-et-tu-ken-duda
15. February 2015 at 13:58
Sumner wrote:
“Let Me Know When Our Critics Respond to Our Actual Ideas”
What is the point? It is not like you’ll respond to them!
Remember the paper by Veetil and Wagner? Your response was effectively “I will not address anything any critic says unless they offer another socialist money rule alternative”.
You have ruled out from the outset any critique that is not itself socialist.
Let us know when you’re ready to actually read critiques.
It’s strange. I am not someone who from the outset refuses to even respond to criticisms of my ideas that are not from anarchists. In fact, I go out of my way to seek out and read critiques from completely opposite foundations.
Why can’t Sumner do this? It is not like he’s a moron whereas I’m not. It is not like he’s an ideologue whereas I am. It is not like he is afraid that thinking from another foundation as an intellectual exercise makes outright acceptance unavoidable whereas I am so afraid. It is not like he is unable to think from another foundation whereas I am so unable.
He lambasts Keynesians for not thinking outside the Keynesian box, and yet he himself refuses to think outside the market monetarist box.
15. February 2015 at 13:59
TravusV:
“Who is right: Ken Duda or Benjamin Cole?”
The truth.
15. February 2015 at 14:01
This is what state driven “recovery” looks like:
https://globalmacrotrading.files.wordpress.com/2014/05/image0022.jpg?w=842
15. February 2015 at 14:12
Robert Waldmann has the dishonorable distinction of not only being totally uninformed about what MM is and claims, he also is probably one of the most insolent, unctuous and off putting fiscal demand side zealots out there. At the end of the day, Waldmann probably hates Scott (and this MM because) he’s succeeded in every way that Waldmann has failed. And failed miserably. And it couldn’t happen to a nicer guy.
15. February 2015 at 16:41
TravisV, I am unaware of what disagreement I have with Benjamin. I read his blog post and still couldn’t figure it out.
Charlie, you wrote:
> You seriously want a system in which traders win
> money by making correct predictions in a
> financial casino?
Maybe if you phrase that neutrally, and could pick an alternative that you think is better, and explain why, we could have a conversation. I am convinced that NGDPLT through pegging NGDP futures would be a massive improvement in monetary policy compared with today’s inflation-targeting-via-interest-rate-targeting plus QE-muddle. Do you prefer the last 8 years of monetary policy over what would have happened with NGDPLT? If so, why?
Ralph, you write:
> Far as I can see, MO is one huge non-idea.
Does that mean you agree with market monetarists about monetary offset? It seemed to me you switched from “market monetarists are wrong” to “market monetarists are saying things that are so basic that everyone else already agrees with them and they’re totally uninteresting to me.”
I think it’s great news if the points I’m trying to make are so banal that everyone already agrees. My objective is to build consensus, not win some academic fight. Thus, my biggest concern with market monetarism is the label. I don’t really want to be a “market monetarist” and enter some fray against Keynesians and Austrians and Neo-fisherites and Neoclassicals. Instead, I want to consider a policy regime consisting of NGDPLT (ideally via NGDP futures pegging), plus automatic fiscal stabilizers if NGDP falls too far below target for too long. (I prefer across-the-board tax credits as the automatic fiscal stabilization mechanism, but am open to other ideas.) Call this New Consensus Monetary and Fiscal Policy (NCMFP). It would be a *massive* improvement compared with current policy. Massive. No more 2009, 2010, 2011, or 2012. It should be something that that everyone from Krugman to Cochrane could get behind as, maybe not optimal, and they’d all have different gripes, but maybe they can all agree that this combination is better than current policy. This would be a consensus policy view that we can all push forward, and set aside our somewhat different models and a different intuition about which model fits the real world the best at any given time.
NCMFP FTW!
-Ken
15. February 2015 at 17:45
Kenneth Duda, how is Krugman wrong by implication as all he refers to is conventional monetary policy?
As to unconventional policy he says he’s skeptical but has no objection if the CBs want to try stuff like NGDP targeting, et, al.
15. February 2015 at 17:47
I get that MMers are convinced that NGDP targeting will work but as Scott himself says that it hasn’t been tried, it remains a conjecture and so for someone like Krugman to be skeptical of is hardly him being wrong by implication just unconvinced as yet though willing possibly to be convinced.
15. February 2015 at 17:48
Overall, if no CB is doing anywhere near what MMers say they should be doing I don’t get this unrelenting opposition to fiscal stimulus.
15. February 2015 at 17:50
” My objective is to build consensus, not win some academic fight. Thus, my biggest concern with market monetarism is the label. I don’t really want to be a “market monetarist” and enter some fray against Keynesians and Austrians and Neo-fisherites and Neoclassicals. Instead, I want to consider a policy regime consisting of NGDPLT (ideally via NGDP futures pegging), plus automatic fiscal stabilizers if NGDP falls too far below target for too long. (I prefer across-the-board tax credits as the automatic fiscal stabilization mechanism, but am open to other ideas.) Call this New Consensus Monetary and Fiscal Policy (NCMFP)”
So why do MMers spend so much time criticizing the use of fiscal policy, Kenneth?
15. February 2015 at 17:54
Waldmann is a Kmart Krugman. Highlighy doubt anyone pays for his quack hack.
15. February 2015 at 18:01
MM has been spot on and supported by the Fed policy and results. It’s probably paralyzing to be a hard money zealot today. It’s a limp, flaccid and impotent policy. Those tied to gold have now sunk to the bottom of an unprofitable existence.
15. February 2015 at 19:29
Mike Sax,
> how is Krugman wrong by implication as all he
> refers to is conventional monetary policy?
It’s classic Krugman. Nothing he says is untrue, but he makes it sound like there’s nothing the central bank can do because of IS/LM, well sure they should try stuff but it probably won’t work, unless they have a real regime change but that can’t happen, therefore fiscal stimulus, which we should be able to do so easily.
Except that we can’t do fiscal stimulus easily, because, you know, Republican-controlled congress. It would be easier to have a regime change in monetary policy than it would be to get fiscal stimulus through this congress or the last one. Instead of bemoaning the impotence of conventional monetary policy at the ZLB, Krugman should be advocating for NGDPLT. Why isn’t he? The only thing he’s written about it that I can find is here: http://krugman.blogs.nytimes.com/2014/07/21/asymmetrical-doctrines-vaguely-wonkish/. All he does is points out that MM doesn’t have the support of democrats or republicans, and therefore (by implication) is irrelevant. It’s just so wrong. “Let me know when our critics respond to our actual ideas.” — now who said that? So that’s why I’m irritated with Krugman. I suspect he is deliberately avoiding NGDPLT because he’s smart enough to see it might work, and that would take the wind out of the sails of the case for the fiscal things he wants to do.
> though willing possibly to be convinced.
Do you really believe Krugman is “willing to be convinced” about NGDPLT? Given what he’s written about it?
> So why do MMers spend so much time
> criticizing the use of fiscal policy, Kenneth?
(Call me Ken). That is a very good question for an MMer. To be honest, I would be grateful if MM’ers spent less time doing that. I think the reason MMers do that is because they are trying to make an intellectual point, which is the dominance of monetary policy over fiscal policy when it comes to nominal aggregates, aggregate demand, closing the output gap. Some of them may do it because they tend to regard fiscal stimulus as wasteful (in the utilitarian sense) compared with closing the output gap through private spending, and therefore don’t like fiscal stimulus. I tend to agree that fiscal stimulus is probably wasteful compared with proper monetary policy, but doing nothing is much more wasteful still because the output gap is a horror. Those hours not worked and resources not harnessed are never ever coming back and have been wasted utterly, as bad as digging holes and filling them in, even worse because at least the hole-diggers-and-fillers would be retaining some connection to the job market. So I regard fiscal stimulus as “second best” rather than as “wasteful”, even though both are true.
> Overall, if no CB is doing anywhere near what
> MMers say they should be doing I don’t get
> this unrelenting opposition to fiscal stimulus.
Mike, I am 100% with you here.
As you are hopefully taking away here, I am not an MMer, but rather a concerned individual who believes that NGDPLT would be a much better monetary policy than what we have today, and that it really matters, and concerned economists and non-economists should join me in making this happen.
Thanks,
-Ken
Kenneth Duda
Menlo Park, CA
15. February 2015 at 19:58
Thanks Scott/Ken, I always like to be clear on these terms of art, so when non-economists ask me what they mean I drool a bit less.
To echo Ken, NGPLT is simply the best monetary policy irrespective of (even vast) fiscal policy differences.
15. February 2015 at 20:03
Ralph,
See here and here.
15. February 2015 at 20:13
Ken, I’ll say this: your attitude is probably more productive than I sometimes see from the MMers.
Even people who might be positively disposed to try something like NGDPLT are turned off with all the harping about ‘driving a stake through the heart of Keynesianism’ et. al.
I’ve said before that it seems to me that liberal/Keynesian types tend to find the idea of moving from inflation targeting to NGDP as in their hearts they never really liked inflation targeting anyway.
However, once the topic turned to monetary offset it makes them nervous as it seems to imply that the GOP will in the future win every argument over spending. Of course, if I understand the argument, it’s that fiscal policy-with optimal monetary policy-isn’t necessary for demand stabilization but there may well be other reasons for spending on any particular fiscal project-eg, if US schools are all dilapidated and need to be repaired, the govt could start a program for people down on their luck to repair them.
“I tend to agree that fiscal stimulus is probably wasteful compared with proper monetary policy, but doing nothing is much more wasteful still because the output gap is a horror. Those hours not worked and resources not harnessed are never ever coming back and have been wasted utterly, as bad as digging holes and filling them in, even worse because at least the hole-diggers-and-fillers would be retaining some connection to the job market. So I regard fiscal stimulus as “second best” rather than as “wasteful”, even though both are true.”
This is something that if the MMers acknowledged I’d probably have been less suspicious of their real aims. However, they tend to focus on the idea that it’s ‘wasteful’ but never concede that it’s second best.
15. February 2015 at 23:09
“proper monetary policy”
And there’s the rub.
If I’m not mistaken Sumner has said that “incompetent” monetary policy is at least partly responsible for the great recession or whatever we’re calling it (fall in ngdp and its failure to return to trend).
NGDP level targeting seems like an improvement but, I don’t think that policy change alone would be sufficient to declare mission accomplished like MMs do. It would be a start. Likewise removing pork from fiscal policy would be a start to better fiscal management.
I doubt people who want fiscal policy as part of the solution are calling for wasteful spending. They too probably would qualify their preferred policy with “proper”. Whatever that is. Oh yeah, according to MMs its successful monetary policy. I can just as easily say the same that they didn’t do fiscal policy right and if we had done it properly…
I bet you could come up with positive value projects wherever you live. Let’s not build roads or other public infrastructure, god forbid. Are all bridges to nowhere?
I’m genuinely curious (as opposed to rhetorically snarkily curious). Do MMS think that severe reduction in income tax rates codified into law would be insufficient to generate positive rates and nominal growth? Would MMs say monetary offset? Isn’t that the goal? Isn’t the whole point to generate sufficient velocity/spending/growth to justify higher rates?
16. February 2015 at 02:54
Kenneth Duda,
Yes: I’m saying that Scott’s definition of monetary offset in his Mercatus article is simply the point that if the central bank thinks inflation looks like getting excessive, it will raise interest rates or do something else to damp down that inflation. And that’s pretty much a non-theory because everyone already accepts that if inflation gets uppity, the central bank will counteract that inflation.
16. February 2015 at 05:50
Ralph, Here’s one:
http://www.themoneyillusion.com/?p=25914
Ken, I believe that if I can convince people that fiscal policy doesn’t work, we’ll get far better monetary policy, as everyone will realize they are the only game in town. When NGDP plunges all eyes will be on the Fed.
Miami Vice, Income tax cuts would be nice, but aren’t a good countercyclical tool. If you want higher velocity, you need faster NGDP growth.
16. February 2015 at 05:51
Ralph, By the way, they are just as hard for me to find as for you to find, I have 1000s of posts.
16. February 2015 at 06:12
Miami Vice,
> I don’t think that policy change alone would
> be sufficient to declare mission accomplished
> like MMs do. It would be a start.
If by “mission accomplished” you mean “stabilizing NGDP and aggregate demand”, then why not?
If by “mission accomplished” you mean “making the economy perfect”, then of course not. The supply side matters too, and there’s nothing that monetary policy can do about the supply side. The best we can do is make the demand side as predictable as possible, and then let the folks in charge of the supply side (private sector and governments) do their best.
-Ken
16. February 2015 at 06:33
Mike Sax,
Scott reminds me of a third and more important factor pushing MMers away from fiscal stimulus to plug an aggregate demand gap:
> I can convince people that fiscal policy doesn’t work,
> we’ll get far better monetary policy, as everyone will
> realize they are the only game in town
Actually Scott is making two important points here. Let me attempt to translate for the lay audience.
1. Fiscal stimulus might not work, because it might bring the economy to a full-employment equilibrium where there is a fixed (as %GDP) structural budget deficit that’s larger than the economy’s real growth rate. In that equilibrium, the Fed won’t expand money because of inflation, but the fiscal authority won’t contract spending because of the output gap. Yikes. I think we all agree that that equilibrium cannot go on forever (exponentials get nasty in the long run). I feel room for argument about what would actually happen in the long run, but you’ve got to admit that this is a scary possibility.
2. If people recognize that fiscal stimulus will not work, they might be more inclined to support monetary stimulus.
My reaction to Scott’s viewpoint is:
1. there’s a very good chance that he’s right about the ultimate failure of fiscal stimulus (and I’m wrong when I characterize fiscal stimulus as “second best”). Fiscal stimulus may well be *counterproductive* in helping the economy reach a sustainable full-employment equilibrium (even if or especially if it is effective in plugging the output gap in any given year); and,
2. I think he’s wrong on the advocacy strategy, because it’s much better to push a consensus that is a big improvement that Keynesians can support, than to lose Keynesian support.
Look, practical people have already recognized that fiscal stimulus doesn’t work because just when you need it most, the assholes and lunatics come out of every nook and cranny crowing about how “in tough times, the government has to tighten its belt too,” “no one can spend beyond their means,” “businesses will never invest as long as they’re shaking with fear over budget deficits,” etc. There are 100 stupid reasons to oppose fiscal stimulus and they merely gain “credibility” exactly when we actually need the stimulus. Therefore, fiscal stimulus doesn’t work because it doesn’t work politically, regardless of the economics. Most people aren’t smart enough to try fiscal stimulus. Very very few are too smart to try fiscal stimulus.
Meanwhile, Keynesians are clearly open to monetary policy improvement. The only person I hear singing the praises of the Taylor rule is Taylor. Everyone on the left and smart+practical people on the right regard monetary policy to have failed. Every one of them should be an NGDPLT supporter. Let’s go get them with the New Monetary and Fiscal Consensus:
1. Switch monetary policy to NGDPLT
2. Enshrine automatic fiscal stimulus in the form of universal tax credits that apply when NGDP drops below target by X and/or there is an output gap for Y for Z amount of time
Scott should support this because #2 will never happen under NGDPLT, and therefore it doesn’t matter what foolish thing we do “when hell freezes over.” Krugman should support this because in his view, #2 will prevent output gaps and excessive unemployment.
I’m not sure if Cochrane should support this or not. Any opinions?
Also, there’s Paul Ryan and the plutocrats to think about it. Any opinions? Smart plutocrats would support this because they’ll make more money if we can avoid output gaps while not triggering too much inflation. Would they be more likely to support it if the automatic fiscal stimulus when primarily to the rich, e.g. tax credit proportional to tax paid in a prior period?
-Ken
16. February 2015 at 16:44
“One of the things that makes me believe that we Hayekians are on the right track is that Hayek critics like Scott Sumner seem unable or unwilling to respond to Hayek’s actual arguments.”
17. February 2015 at 13:52
Ken, you describe Scott’s basic steps as:
1. tell the market that you are switching to NGDP level targeting
2. tell the market what the level targets are for the next N years
3. tell the market you will do “whatever it takes” to hit those targets, i.e., nothing else will factor into monetary policy.
4. do all of the things the fed does now to target inflation and interest rates (models, OMO’s) but with the NGDP target as the target instead of inflation.
I think the critics of MM are skeptical because the Fed hasn’t been able to hit its current target in years. If it just switches to a new target and does the same ole things its been doing to hit the old target(4), there’s good reason to believe it won’t be able to hit the new one either. I’ve seeen Scott put much emphasis on doing “whatever it takes.” But buying up everything on the planet is not something any central bank has ever been legally permitted to do. Giving a central bank that authority would be a radical step, and probably cause the “Audit the Fed” bill to become a reality (How would markets react to the new Congressional Reserve Board?). If the Fed continues to buy up just financial assets, liberal critics may admit that the Fed could theoretically hit its nominal target, although still harbor messy real-world doubts ala Krugman, but also worry about the distributional consequences of a purely asset-targeted monetary stimulus.
17. February 2015 at 14:06
Jared, You have it exactly backwards. Under NGDPLT the Fed would do far less than today. For instance, in Australia the monetary base is only about 4% of GDP, vs. over 20% in the US and even more in Japan. The faster the expected rate of growth in NGDP, the lower the real demand for base money.
This is the same mistake Switzerland made when they stopped pegging their currency a few weeks ago. They thought this would help reduce the size of their balance sheet, but they are finding out the opposite is true.
So if you are worried about the “distributional effects” of QE (and you should not be, they are not important), that should make you MORE inclined to support NGDPLT, as less QE would be needed than under the current regime.
It’s is important to separate out several issues:
1. What should you target?
2. How big should the balance sheet be?
To make the balance sheet smaller, you aim for a faster rate of NGDP growth.
You are right that many liberals obsess about how big the balance sheet would have to be, but that’s because they’ve got everything backwards. A faster rate of NGDP growth leads to a smaller balance sheet in the long run.
If I’d had my way the Fed never would have done any QE.
17. February 2015 at 18:41
I appreciate your feedback Ken, a lot. As you have gone to the trouble to really try to explain things to me I will take the time to respond to some of your points with some questions and opining of my own.
‘Fiscal stimulus might not work, because it might bring the economy to a full-employment equilibrium where there is a fixed (as %GDP) structural budget deficit that’s larger than the economy’s real growth rate. In that equilibrium, the Fed won’t expand money because of inflation, but the fiscal authority won’t contract spending because of the output gap. Yikes. I think we all agree that that equilibrium cannot go on forever (exponentials get nasty in the long run). I feel room for argument about what would actually happen in the long run, but you’ve got to admit that this is a scary possibility.”
I’m glad that you feel room for argument about long term effects as I’m not so clear on what would happen. I’m not sure
A) Why we would necessarily end up in this equilibrium
B) Why if we did it would be so negative.
Is A and/or B based on an assumption that even mild budget deficits are inherently pernicious?
I’m asking as I don’t know.
“If people recognize that fiscal stimulus will not work, they might be more inclined to support monetary stimulus.”
Is this a kind of Machiavellian argument that even if fiscal stimulus does work it’d be beneficial for people to think that it doesn’t?
“I think he’s wrong on the advocacy strategy, because it’s much better to push a consensus that is a big improvement that Keynesians can support, than to lose Keynesian support.”
I tend to think you’re right there.
By losing Keynesian support it might gain you conservative support. But if the goal as you see it is consensus then I think you’re right.
I’ve suggested before that it seems to me that MM is two-pronged.
1. Move from inflation targeting to NGDP targeting
2. Monetary offset
In this sense, the idea about NGDP futures is a corrolary of 1.
Some like Mark Sanowski have argued that futures can’t work. There is the claim that they are too easily gamed or that NGDP data is too noisy.
I’ll be humble enough to admit I don’t have a strong opinion on futures either way as I really don’t know but I wish you and Scott success. I find the whole project your undertaking kind of romantic.
Basically, though, you could in a broad brush way argue that 1 appeals to liberals who never really liked inflation targeting in the first place; whereas 2 appeals to conservatives-who are suspicious of 1 until they see 2.
“Look, practical people have already recognized that fiscal stimulus doesn’t work because just when you need it most, the assholes and lunatics come out of every nook and cranny crowing about how “in tough times, the government has to tighten its belt too,” “no one can spend beyond their means,” “businesses will never invest as long as they’re shaking with fear over budget deficits,” etc. There are 100 stupid reasons to oppose fiscal stimulus and they merely gain “credibility” exactly when we actually need the stimulus. Therefore, fiscal stimulus doesn’t work because it doesn’t work politically, regardless of the economics. Most people aren’t smart enough to try fiscal stimulus. Very very few are too smart to try fiscal stimulus.”
I find the existence of these assholes more an argument for not electing Republicans than not doing fiscal stimulus.
“Meanwhile, Keynesians are clearly open to monetary policy improvement. The only person I hear singing the praises of the Taylor rule is Taylor. Everyone on the left and smart+practical people on the right regard monetary policy to have failed. Every one of them should be an NGDPLT supporter. Let’s go get them with the New Monetary and Fiscal Consensus.”
See one thing that I have found frustrating with MMers is they act like Keynesians are opposed to monetary policy improvement when I feel like their kicking sand in my face when I and most Keynesians offer an open door. So you’re observation here is very important and helpful. I think such a consensus could work to the extent that while many wouldn’t feel their getting their first best policy it would at least be second for third best.
18. February 2015 at 02:38
“Some like Mark Sanowski have argued that futures can’t work.”
I read the mercatus report. Without commenting on NGDPLT, it is quite clear you can move forward promoting it without the Future market component. The Future as you have it designed, is designed not to want to trade it, and not to have to trade it, until very close to expiration (I previously asked you about expiration date coinciding with ?, you did not reply).
Basically it will not trade until the last minute/days.
Secondary – I would also think if someone like Soros threw 10 Billion dollars and the Fed had to print 10 Trillion (your number was 1000:1). The PR would be an absolute mess. Huff Po Headline: Soros controls the Fed.
I always believed the market led, Fed follows, and I always believed it was best for the Hoi Polloi to believe it was the other way around.
Again- NGDPLT does not require the Fu, and I would let that part die a fast death.
18. February 2015 at 04:04
Dervis, are TIPs spreads comparable to NGDP futures? Based on what you’re saying they can’t be. If not why not?
18. February 2015 at 04:33
“If not why not?”
TIPS are not “pegged”
Also, The transaction in any other future that I can think of (and I’ve traded most of them), does not result in creating an offsetting (if not greater) opposing transaction. i.e, If I sell a normal future, I know I am weakening a market and benefiting my initial position. Even if I do not sell the entire volume I desired to sell (the market moves away from me), it results in me being P+L positive on my initial transaction. As designed, a sale of an NGDP future results in my actually driving the market right into my face (sale of 1 creates 1,000 opposing me). If I am early, anyone else that sees what I saw (normally would be a benefit to me), again no longer benefits me, as their transactions also pushes the market back to the peg price, without me benefiting.
The final point of waiting to trade at the last minute, is essentially the same as if you asked me to early exercise an option with extrinsic value less than carrying cost.
With a gun to my head, I ask you to pull the trigger before I ever exercise an option inefficiently. Hell, I’d pull the trigger for you.
18. February 2015 at 06:04
Hi Mike,
> I’m glad that you feel room for argument about long term effects as I’m
> not so clear on what would happen.
Neither am I. That’s why in the New Monetary Fiscal Consensus, I advocate applying automatic fiscal stimulus if we remain too far under the NGDP target for too long and there is an output gap.
> By losing Keynesian support it might gain you conservative support.
If you divide conservatives into three groups:
1. Libertarians
2. Austrians (some overlap with #1)
3. Big business types
Then I think #1 and #2 are just hopeless; they object to any central bank scheme based on “ethics”. And I think the New Monetary Fiscal Consensus has a chance of appealing to #3 even with automatic fiscal stabilizers because business leaders understand they make more money if people have enough money to buy their products.
> I find the existence of these assholes more an argument for not electing
> Republicans than not doing fiscal stimulus.
Unforutnately that is not going to change any time soon, but monetary policy really could change, which is why it’s so important that you support our efforts here.
> I feel like their kicking sand in my face when I and most Keynesians
> offer an open door.
I know. I haven’t given up on arguing with Scott about this.
Thanks,
-Ken
18. February 2015 at 06:06
Jared:
> I think the critics of MM are skeptical because the
> Fed hasn’t been able to hit its current target in years.
The Fed hasn’t hit its target because it’s not trying to. (I assume you are referring to the 2% inflation target).
Note that the Fed is not even clear what its target is. It makes frequent reference to its “dual mandate”, and in fact is sometimes explicitly targets unemployment (“QE will be in place until unemployment drops under X”). And the inflation target itself is wishy-washy. The Fed says it’s a 2% target, which means it should average to 2% over time, which as you point out, it hasn’t. But a lot of people think that the hawks have turned a 2% target into a 2% ceiling, and with a 2% ceiling, no one knows how close the Fed is trying to get.
Second, the Fed is obviously not trying to hit its 2% target. If any sane persion aiming at a target misses low 20 quarters in a row, you think they’d aim higher. Only our incompetent Fed would aim lower in that situation (the taper). Are you sure they “can’t” it their target, because to me, it looks like they are choosing not to.
NGDP level targeting avoids all of these problems. You are targeting only one thing: the level of NGDP. And if you undershoot one quarter, then you aim even higher the next (the “level” part of “level targeting”), whereas with inflation (rate) targeting, the Fed seems to ignore its past mistakes.
-Ken
18. February 2015 at 09:55
The problem with NGDP targeting vs. today’s inflation targeting, is that to hit your NGDP target, the Fed would have to hit a higher inflation target — which it either can’t, or won’t, do.
Many forces affect inflation and the Fed doesn’t have as much power as some believe. The Fed may also be reasoning, ‘Yes, we could trigger higher inflation, but a) this would create problems on its own, and b) the measure that would be required to trigger higher inflation could have negative, perhaps unforeseen consequences.’
…
Let’s not forget, either, that neither of these two mandates (inflation or employment) is the Fed’s real-world primary mandate, which is the support of a healthy private banking system.
18. February 2015 at 09:55
derivs, I’m afraid I don’t understand your comment.
18. February 2015 at 09:58
Charlie, You said:
“The problem with NGDP targeting vs. today’s inflation targeting, is that to hit your NGDP target, the Fed would have to hit a higher inflation target “” which it either can’t, or won’t, do.”
There is no obvious difference in the long run rate of inflation under each target. For each inflation target, there is a NGDP target that will produce equal inflation.
18. February 2015 at 11:05
Ken (and Scott):
> Are you sure they “can’t” it their target, because to me, it looks like they are choosing not to.
I see where you’re coming from, but I’m not ready to buy it yet. The Fed was not hitting either its inflation or unemployment targets before the taper. If all it takes is a little public dissent from a couple FOMC hawks and a little amibiguity in the Fed’s mission statement to derail $3.5 trillion of asset purchases from creating anything close to 2% inflation, why couldn’t those types of hiccups also prevent the Fed from hitting an NGDPL target? There will still be hawks on the FOMC with an NGDPL target, and they will not like to see 4% inflation and 1% RGDP growth, even if they are hitting target. I could easily imagine them making noise to tighten monetary policy with a move, allegedly consistent with their NGDPL target, attempting to spark more real growth and less inflation. If the existence of any public doubt as to whether the Fed can, or is trying to, hit its target will undermine actually hitting the target, then monetary policy is not quite as powerful a tool as you seem to think it is.
18. February 2015 at 11:23
Jared, I don’t think you understand the nature of NGDPLT. For instance, you say there’d still be hawks under NGDPLT. No there wouldn’t, it makes no sense to be a hawk with NGDPLT, because the growth rate of NGDP is the same in the long run anyway, all that matters is volatility. And both hawks and doves want to reduce volatility. The only debates remaining would be technical.
In contrast, under inflation targeting you have doves who prefer a slightly higher inflation rate, and hawks who prefer a slightly lower inflation rate. That doesn’t happen with LT.
The second mistake you make is to assume that it’s equally hard to boost NGDP under level targeting as growth rate targeting. Not true, with level targeting you don’t even need to do QE (or perhaps I should say you only need to do a tiny amount of QE.)
18. February 2015 at 11:47
“Unforutnately that is not going to change any time soon, but monetary policy really could change, which is why it’s so important that you support our efforts here.”
You know Ken it makes me think of some New Testament Bible verse: ‘As and it will given to you, seek and ye shall find.’
http://biblehub.com/matthew/7-7.htm
http://biblehub.com/luke/11-9.htm
Looks like it’s in both Matthew and Luke.
Anyway, you’re smart enough to do that. If you are asking for my support, you have it. It’s that simple.
Believe it or not no MMers have actually taken this simple step of asking me before.
18. February 2015 at 11:48
“Ask and it will be given to you, seek and ye shall find.’
18. February 2015 at 11:54
Of course that doesn’t mean I have no further questions but I do agree that one should always be willing to accept a 2nd, 3rd, or 4th best policy if it’s better than the status quo.
18. February 2015 at 13:36
Scott, you’re right, I don’t understand NGDPLT; but I’m trying, and every time I think I get it, you throw me a curve ball.
It might not make sense to be a hawk under NGDPLT, but since when did logic stop anybody from being unreasonable? I think it’s a bit naive to think “The only debates remaining would be technical.” Ideology and simple misunderstanding are notoriously difficult to eradicate. My point is, since it’s all about expectations, as long as there are differing opinions on how the Fed will interpret its mandate or act to achieve it, then, monetary policy can be undermined.
You also say “with level targeting you don’t even need to do QE (or perhaps I should say you only need to do a tiny amount of QE.)” So you say. I’m not convinced. I think this is the point you need to flesh out some more (for your critics and those of us who are just a bit slow). It seems you often just assume what others find the most contentious. I’ve seen the argument that if the market perceives the increase in the monetary base as permanent, then a little QE can go a long way. But that again relies on expectations, which rely on interpretations of signals… which leaves the door open for failure.
18. February 2015 at 16:58
Ken when I try to link on your name I get nothing. Are you willing to correspond by email?
19. February 2015 at 10:27
Jared, I’d recommend my papers on NGDPLT.
This might help. If the inflation target is missed by 1% every year, you drop to 1% inflation, and possibly to the zero bound. If the 5% NGDPLT target is missed by 1% every year, you have 4% NGDP growth the first year, and 5% every future year. I’ll take that!
My point is that if they screwed up every bit as badly (under NGDPLT) as you say they are screwing up today, that would be a huge success in my book.
2. March 2015 at 03:55
I will respond to your ideas. The reason NGDPLT will fail is that inflation has positive feedback loops.
http://www.howfiatdies.blogspot.com/2015/02/gleeful-money-printers.html
2. March 2015 at 04:01
You would still have hawks and doves. Just they would want to target 8% NGDP growth or 4% NGDP growth. The debate would be the same just with real GDP growth added in.
2. March 2015 at 04:04
And if they can’t hit an inflation target which just depends on the future value of money why do you think they can hit a target that depends on the future real GDP growth (not known) and the future value of money (not known)? You have multiplied by another unknown which will not make it easier to hit the target.
2. March 2015 at 04:22
NGDPLT would not have helped Argentina, Ukraine, or Venezuela. The problem is that government spends far more than they get in taxes and at some point they need the central bank to print money and buy their bonds. Since the government appoints the people who run the bank, and makes the laws governing the bank, and has the guns, the bank always goes along. You can not find a single case where a government defaulted on a debt in a currency their central bank could have printed. So doomed to fail at some point.
2. March 2015 at 04:28
Japan is about to get hyperinflation. They would be about to get hyperinflation with NGDPLT also. Would not have changed anything.
2. March 2015 at 04:32
Japan is about to get hyperinflation.
Wanna bet on it ?
2. March 2015 at 04:42
No, but I would love for you to try to address my actual ideas. 🙂
2. March 2015 at 04:49
The fundamental flaw in inflation targeting or NGDPLT is thinking that the central bank controls inflation like a thermostat controls the temperature in a room when really there is a potential chain reaction that can make the money melt down and few people understand this.
2. March 2015 at 05:17
“NGDPLT would not have helped Argentina, Ukraine, or Venezuela.”
ROFLMAO.. 3 countries whose list of problems extend for pages prior to even beginning a discussion of monetary policy.
2. March 2015 at 06:52
The problem they all have, and many other countries, is that they spend more than they get in taxes and ended up being forced to print money. The why/details of the rest of their problems don’t matter. Once a country gets to where it is forced to print money, the money will crash no matter what the official central bank policy was before that. Watch Japan. They are in the “forced to print” box now. No realistic way out at this point.