Was the so-called “monetarist experiment” ever tried?

Jim Glass left this response to my (italicized) claim:

1. The Fed said it would start targeting the money supply, but it did not do so …. 1979-82 told us essentially nothing about the long run effect of money supply targeting. It wasn’t even tried.

I don’t understand you here. Certainly money supply targeting wasn’t tried over a long run, so one can’t see any long-run effect of it. But why do you say money supply targeting wasn’t adopted at all?

Volcker in his 1992 memoir “Changing Fortunes” explained why the Fed in 1981 had to change policy to money supply targeting from interest rate targeting, and went into considerable detail about the political resistance from the Reagan Administration that he had to overcome to do it, and the political ploys he used to do so. I don’t see why he’d make up such a detailed story about something that never happened.

Plus, looking at the M1 numbers for the period from Fred, one sees that after rising steadily pretty much from beginning of time, M1 peaked at $429 billion on 4/20/81, three months before the start of the recession, then went down a little bit, then bounced down a tiny tad and back up again repeatedly to hit pretty much exactly $429b again on 7/6, 8/10, and 10/12 thru 10/26 without ever going at all over $429b (or going below $423b). So on the dates three months before the recession started and then three months after it started, M1 was $429b, exactly unchanged. If the money supply wasn’t being targeted during that period, all those $429b numbers are a heck of a coincidence.

It’s certainly possible that the Fed was paying more attention to M1 than before.  I agree with that claim.  But there can be no dispute that they did not adopt Friedman’s proposal of a steady 4% growth rate in the money supply.  Indeed money growth actually became much less stable during 1979-82, which shows that Volcker moved policy even further away from Friedman’s ideal.  Now of course in a different sense you could say monetarism was adopted, as he used a tight money policy to control inflation.  That policy was a success.

But a money growth rule?  It’s never even been tried.  (And I hope it never will be tried, as it’s probably a lousy idea.)


Trump would raise taxes on struggling middle class families, so that billionaire real estate developers could get a massive tax cut.

Dylan Matthews has a great new post showing that Trump’s new tax plan would devastate the sort of Americans who have been struggling hardest with the new economy:

Batchelder provides several examples of families that would see their taxes go up under Trump’s plan. The biggest hikes number in the thousands of dollars, and are concentrated among single parents:

  • A single parent with $75,000 in earnings, two children in school, and no child care costs (because the kids are in school) would pay $2,440 more.
  • A single parent with $50,000 in earnings, three children in school, and child care costs of less than $6,000 would pay $1,188 more.
  • A married couple with $50,000 in earnings, two kids in school, and no child care costs would pay $150 more because of the bottom bracket’s increase from 10 to 12 percent.

Batchelder helpfully summarizes this in two tables, one for single parents:

Table: Single parent families facing tax increases under Trump

What will Trump do with this money that he takes from our struggling middle class? Slash income taxes from 40% to 15%, for (non-corporation) billionaire real estate developers like, well . . . like Trump himself.  Here’s Binyamin Appelbaum:

Mr. Trump proposed last year to sharply reduce the corporate rate to 15 percent, from 35 percent, and to apply the same rate to passthrough income. Democrats sharply criticized that proposal as a giveaway to the owners of passthrough businesses, a group that includes many real estate developers like Mr. Trump, because they would not need to pay a second round of taxes on dividends. The Tax Foundation says it would cost the government about $1 trillion over 10 years.

You should read the entire piece, it’s probably the most hilarious news article I’ve read in years.  (And Appelbaum is a deeply serious reporter.)

The Trump people aren’t even pretending that any of this is serious.  They basically admit to the reporters that it’s all a lie. I’m beginning to feel sorry for Larry Kudlow, he has no idea what he’s hitched his wagon to.

If the Clinton campaign were smart (which I increasingly doubt), then between now and election day they do nothing but run commercials of real people, showing how much their taxes would go up under Trump’s plan.  His tax people are so incompetent they don’t even know how to lie properly. They just handed her a juicy issue, on a silver platter.  Now watch her flub it.

This caught my eye:

The easiest short sales I’ve ever had in my life were the stocks and bonds of Donald J. Trump’s companies. … It was like numerous ocean liners hitting many icebergs repeatedly.  —   Jim Chanos, Kynikos Associates

Like his business career, a Trump presidency will be very good for Trump himself, and very bad for the companies country he runs.

Why should we live in a low rate world?

The Economist can be very good on monetary policy.  For instance, they’ve endorsed NGDP targeting.  And then there are other times.  Check out the subtitle of their new cover story on living in a low rate world:

Central banks have been doing their best to pep up demand. Now they need help

Actually, they have not been doing their best, and it’s not even debatable:

1.   The Fed raised rates last December, and just a week ago indicated that it is likely to raise rates again later this year.  Is that doing your best to inflate?

2.  The ECB and the BOJ have mostly disappointed markets this year, offering up one announcement after another that was less expansionary than markets expected.

So no, they are not doing their best.  If at some point they do in fact do their best, and still come up short, then by all means given them help.

And what should that “help” look like?  Simple, give them more policy tools.  I.e. a higher target, or the right to buy more kinds of assets.  Whatever help they need.

And then there is this:

To live safely in a low-rate world, it is time to move beyond a reliance on central banks. Structural reforms to increase underlying growth rates have a vital role. But their effects materialise only slowly and economies need succour now. The most urgent priority is to enlist fiscal policy. The main tool for fighting recessions has to shift from central banks to governments.

Actually, the Japanese have already shown that enlisting fiscal policy does not help.  In fact, Japanese NGDP growth has picked up a bit since 2013, despite the fact that fiscal policy has become tighter.  Instead of resigning ourselves to a low rate world, why not have central banks create a higher rate world, by raising their NGDP/inflation target?  And tell the banks to actually hit their targets.  A low rate world is a choice, not some inevitable fate sent down to us by the gods.

To their credit, they realize that infrastructure spending cannot stabilize a modern economy:

But infrastructure spending is not the best way to prop up weak demand. Ambitious capital projects cannot be turned on and off to fine-tune the economy. They are a nightmare to plan, take ages to deliver and risk becoming bogged down in politics. To be effective as a countercyclical tool, fiscal policy must mimic the best features of modern-day monetary policy, whereby independent central banks can act immediately to loosen or tighten as circumstances require.

But then suggest something even less effective:

Politicians will not—and should not—hand over big budget decisions to technocrats. Yet there are ways to make fiscal policy less politicised and more responsive. Independent fiscal councils, like Britain’s Office for Budget Responsibility, can help depoliticise public-spending decisions, but they do nothing to speed up fiscal action. For that, more automaticity is needed, binding some spending to changes in the economic cycle. The duration and generosity of unemployment benefits could be linked to the overall joblessness rate in the economy, for example.

Actually, a number of studies show that extended unemployment benefits make unemployment even higher. When President Bush made unemployment benefits more generous during the 2008 recession, Brad DeLong correctly predicted that it would push unemployment 50 basis points higher by Election Day. Another example occurred in 2014, when we saw job creation accelerate by about 700,000 (from 2.3 million in 2013 to over 3 million in 2014), after the extended benefits were eliminated.  Exactly the opposite of what Keynesians like Paul Krugman expected.

I have a better idea; have the BoE adopt a more expansionary monetary policy.  Their governors will warn that this will push inflation above target. OK, but make up your mind—do you want more demand, or not?

Should Hillary claim that she also opposed the Iraq War?

The Iraq War was a debacle.  Hillary supported it.  So wouldn’t it be in her interest to start claiming she opposed it?  Forget the morality of the idea; would it work as a campaign strategy?

Many people probably find the suggestion to be absurd.  Almost ludicrous.  But why?

They’d say she supported the war.  There is a paper trail showing her support.  She could never get away with claiming she opposed it.  Maybe so, but Trump also support the Iraq War, and did so publicly. Nonetheless, Trump does in fact claim that he opposed the Iraq War, and reporters do let him get away with it.  So why can’t Hillary?  Why the double standard?

Hillary’s core supporters include lots of smart/idealistic people like Paul Krugman, who would be outraged by Hillary lying about her support for the war. Yes, they let her shade the truth on murky personal questions like emails, but they’d be outraged by a bald-faced lie on a key policy issue.  She is seen as a competent manager of government (wrongly in my view).  In contrast, Trump is never seriously seen as someone who would actually govern the country. He’s running as a sort of troll, a way for voters to show their contempt for the establishment. The American Brexit. The truth value of his claims about the Iraq War have no importance, nor do his claims about the “40%” unemployment rate, or indeed anything else.  It makes no difference whether or not he favors a higher minimum wage, or infrastructure, or paying off the national debt in 8 years, or anything else.  He’s a troll, and all that matters is that he annoys the (global) establishment.

I’m a member of the global establishment, if you define the term loosely enough, and so I’m annoyed.  Not because his policies would hurt me, indeed they’d massively help my career.  Every day after January 20th would be like Christmas, as I got to watch the look on alt-right and supply-sider faces as they found out the truth about Trump. The blogosphere would go crazy.

Rather I’m annoyed because we have a track record here, and Trump people don’t seem to know it. Throughout history, there have been lots of right-wing demagogues who engaged in the big lie.  Today we see Duterte in the Philippines, Orban in Hungary, Putin in Russia, Erdogan in Turkey, etc.  A few years back we had Berlusconi in Italy.  In earlier decades we saw many others.

It never turns out well.  That’s what Trump supporters don’t get, it never turns out well.

Maybe Trump will be a first, but I doubt it.  (Of course left wing demagogues (Chavez, etc.) are usually even worse.)

PS.  I can already anticipate what commenters will say, but I know that deep down you guys don’t believe it.  Deep down even the most die-hard Trump supporter would be shocked if Hillary suddenly started claiming that she opposed the Iraq War.  So don’t waste your time denying it.  I don’t believe you.

PPS.  I would LOVE to see Hillary deny that she supported the Iraq War, in tonight’s debate.  As a prank, a way of making a point.  Trump would take the bait and insist she was lying.  But she could reply “how is that different from your lies about opposing the war”.  After the debate the news media would be all over the issue, and would end up claiming that both sides were lying.  It would be the big story—man bites dog.  Then Hillary could say she was “just being sarcastic”, which Trump always uses as a get of of jail free card, when he is caught saying something idiotic (and that he didn’t realize at the time was idiotic.)  She could say she was just trying to make a point—how ridiculous Trump’s lies are.

She won’t take my advice.  And I suppose she shouldn’t.  But it’s a nice daydream.

PPPS.  You want double standards?  Remember when Trump bragged about his sexual prowess in a GOP debate? Try to imagine a female candidate doing something comparable. It makes my head explode. I guess I have a double standard too.  (Any comments on the PPPS will be deleted.)

An unruly debate over policy rules

George Selgin has a new piece criticizing Narayana Kocherlakota on policy rules. Here’s the intro:

I was just about to treat myself to a little R&R last Friday when — wouldn’t you know it? — I received an email message from the Brookings Institution’s Hutchins Center. The message alerted me to a new Brookings Paper by former Minneapolis Fed President Narayana Kocherlakota. The paper’s thesis, according to Hutchins Center Director David Wessel’s summary, is that the Fed “was — and still is — trapped by adherence to rules.”

Having recently presided over a joint Mercatus-Cato conference on “Monetary Rules for a Post-Crisis World” in which every participant, whether favoring rules or not, took for granted that the Fed is a discretionary monetary authority if there ever was one, I naturally wondered how Professor Kocherlakota could claim otherwise. I also wondered whether the sponsors and supporters of the Fed Oversight Reform and Modernization (FORM) Act realize that they’ve been tilting at windmills, since the measure they’ve proposed would only require the FOMC to do what Kocherlakota says it’s been doing all along.

So, instead of making haste to my favorite watering hole, I spent my late Friday afternoon reading,“Rules versus Discretion: A Reconsideration.”  And a remarkable read it is, for it consists of nothing less than an attempt to champion the Fed’s command of unlimited discretionary powers by referring to its past misuse of what everyone has long assumed to be those very powers!

To pull off this seemingly impossible feat, Kocherlakota must show that, despite what others may think, the FOMC’s past mistakes, including those committed during and since the recent crisis, have been due, not to the mistaken actions of a discretionary FOMC, but to that body’s ironclad commitment to monetary rules, and to the Taylor Rule especially.

The post is much longer and provides a detailed rebuttal of Kocherlakota’s claims. Those who read George know that he is a formidable debater, and I end up much more sympathetic to his view that to Kocherlakota’s view of discretion.  But it’s also important to be as generous to the other side as possible, so that their views don’t seem too outlandish.  Here are two senses in which it might make sense to criticize the Fed for an excessively rules-based approach.

1. One criticism would be that the Fed was too tied to inflation targeting in 2008, when it would have been appropriate to also look at other variables.  In that case, George and I would argue something closer to an NGDP target.  But of course that’s not discretion, it’s a different rule.

2.  Kocherlakota’s main objection seems to be that the Fed put too much weight on Taylor Rule-type thinking. One can certainly cite periods where money was (in retrospect) too tight, especially during and after 2008.  And it’s very possible that the excessive tightness was partly related to Taylor Rule-type thinking.  Thus I would not disagree with the claim that, at any given point of time, the Taylor Rule formula might lead to poor policy choices.

But in the end I don’t find his claim to be all that convincing.  Selgin demonstrates fairly convincingly that while they may have occasionally paid lip service to Taylor Rule type thinking, they were in no sense following a specific instrument rule. John Taylor also makes this argument, and indeed criticized policy for being too expansionary during the housing boom.  I’m going to try to better explain this distinction by reviewing the so-called “monetarist experiment” of 1979-82.

The conventional wisdom is that the Fed adopted money supply targeting in 1979, ran the policy for three years, and then abandoned it in 1982 due to unstable velocity.  As always in macroeconomics, the conventional view is wrong.  Just as wrong as the view that fiscal stimulus contributed to the high inflation of the 1960s, or that oil shocks played a big role in the high inflation of the 1970s, or that Volcker had a tight money policy during his first 18 months as Fed chair. Here’s what actually happened:

1.  The Fed said it would start targeting the money supply, but it did not do so.

2.  The Fed had a stop–go policy in 1979-81, and then a contractionary policy in 1981-82.

3.  Velocity fell sharply in 1982, just as the monetarist model predicts.

The three-year “monetarist experiment” saw inflation fall from double digits to about 4%.  That would be expected to reduce velocity.  Friedman’s 4% money supply rule is supposed to work by keeping inflation expectations stable, so that velocity will be more stable.  But inflation expectations were not kept stable during 1979-82, so the policy was never really tested long enough to see if it works.Having said that, I’d rather not give the 4% money growth rule a “fair test”, as that would take decades, and would probably result in the policy failing for other reasons.  But 1979-82 told us essentially nothing about the long run effect of money supply targeting.  It wasn’t even tried.

In a similar way, the Fed set interest rates far below Taylor Rule levels during the housing boom.  So even if a momentary switch to Taylor Rule policy did occur during the housing bust, it’s not really a fair test of the policy.  It’s be like driving rapidly toward the edge of a cliff, ripping off the steering wheel and handing it to the passenger, and then saying “OK, now you drive”.

Having said that, I also don’t favor the Taylor Rule.  And even John Taylor is open to modifications based on new information as to the actual level of things like the equilibrium interest rate.  When I’ve heard him talk, he’s actually calling on the Fed to adopt some sort of clear, transparent procedure for policy, so that when they make a move, it will be something the markets could have fully anticipated based on publicly available macro/financial data. In that case, I agree, which is why I am more sympathetic than many other economists to what the House is trying to do with its proposed Fed policy rule legislation.

If the Fed won’t adopt my futures targeting approach, then I’d at least like them to make their actual decision-making transparent.  Show us the model of the economy, and the reaction function.  If the model later has to be tweaked because of new developments in macro, that’s OK.  Keep us abreast of how it’s being tweaked.  If FOMC members use multiple models then show us each model, and set the fed funds target at the median vote.  However they make decisions, Fed announcements should never be a surprise.

I’d also like to make a point about “rules” in the sense of policy goals, rather than instrument rules.  People often seem to assume that NGDPLT is a “rule” in the same sense that 2% inflation targeting is a rule.  Not so, NGDPLT is more rule-like that current Fed policy, in two important ways:

1. Any sort of NGDP targeting tells us exactly where the Fed wants the macro economy to be in the future, whereas 2% inflation targeting is much more vague. That’s because the dual mandate doesn’t tell us how much weight the Fed puts on inflation and how much they put on employment.  Even worse, the Fed often predicts procyclical inflation, which would seem to violate the dual mandate.  So it’s not at all clear what they are trying to do.  Should the Fed try to push inflation a bit above 2% during periods of low unemployment, so that it averages 2% over the entire cycle?  I don’t think so, but I have no idea what the Fed thinks, as they don’t tell us.  With NGDP targeting it’s clear—aim for countercyclical inflation.

2.  Going from NGDP growth rate targeting to NGDPLT, also makes policy much more rules based.  Under NGDPLT, I have a very good sense of where the Fed wants NGDP to be 10 years from now.  That helps us make more intelligent decisions on things like determining the proper yield on 10-year corporate bonds. If they miss the target on a given year, I know that they will aim to get back onto the old trend line.  In contrast, the Fed currently doesn’t have any clear policy when they miss the target.  Are they completely letting bygones by bygones, or do they aim to recover a part of the lost ground?  I have no idea.  It seems to vary from one business cycle to the next.  In 2003-06 they regained ground lost in the 2001 recession, but in 2009-15 they did not do so.

I certainly also favor a policy rule for the instrument setting, but even if the instrument setting were 100% discretionary, I would view NGDPLT as an order of magnitude more rule-like than a “flexible” 2% inflation target, which also takes employment into account.