Occupy the Wall Street Journal

What’s happened to the Wall Street Journal?  They seem to be increasingly veering toward the Rick Perry school of monetary analysis.  Here’s an example of an article that’s wrong about almost everything:

There are at least three problems with this [NGDP targeting] strategy, however. First, it assumes that the Fed can sensibly determine the “right” trend for nominal GDP. Second, it isn’t clear that it can actually achieve any such target. And third, doing so would run a huge risk of conflicting with the Fed’s congressional mandate to promote “stable prices”—something that can’t unilaterally be rewritten. This is because any boost to nominal GDP may well come more from higher inflation rather than from faster growth in underlying GDP, which Goldman acknowledges. After all, the economy’s real potential growth rate has been slowing for decades.

1.  But doesn’t inflation targeting also assume you can determine the “right” level of inflation?  And also determine the “right” inflation index (there are many, whereas there’s basically one NGDP.)

2.  If they can’t achieve an NGDP target, then ipso facto they can’t achieve an inflation target.

3.  There is no Fed mandate for “stable prices.”  Indeed if the Fed thought that price stability was the mandate they’d be violating the law.  The Fed mandate is stable prices and high employment.  If you targeted stable prices, you’d be implicitly putting a weight of zero on employment.  In contrast, NGDP targeting addresses both sides of the dual mandate.

I can’t imagine any reputable economist disagreeing with me on any of these three points, even if he or she hated NGDP targeting.  The WSJ is simply flat out wrong.

First, it is tempting, but probably mistaken, to assume the Great Recession came along and knocked the U.S. off an otherwise sustainable growth track. It wasn’t an external shock, but internal weakness, that led to the economy’s collapse.

One worrying aspect of GDP growth prior to 2007 was that it came even as real household incomes stagnated. Assuming that boom-era growth rates were sustainable, and not fueled by a surge in house prices and a credit boom that simply pulled forward demand from the future, is a huge leap in logic.

Um, the target is NGDP, not RGDP.

Second, even if the Fed were to aim at a particular nominal GDP target, it isn’t clear policy makers could successfully hit it. Consider how recent gains in the consumer-price index, particularly in food and energy, have outstripped any increase in wages. This has hurt real income growth, undermined consumer confidence, and weakened, not strengthened, the economy.

For the Fed to generate inflation, it needs households to believe the central bank is fueling not just higher prices but wage gains, too, so that they start spending more. Otherwise, households will simply tighten the purse strings instead.

The whole point of monetary stimulus is that wages are sticky, and hence higher aggregate incomes would lead to more jobs, and more hours worked.  “Whether households “tighten purse strings” has no bearing on whether NGDP targeting can work.  Don’t you love it how the WSJ switches over to Keynesian economics, just after they’ve trashed the idea that the economy needs demand stimulus.  Is there any model there?

In addition, the food and energy price increases are mostly supply-side phenomena.  When the Fed generates inflation, real incomes rise (assuming there is economic slack.)

Moreover, the level of general inflation it would take to transform housing, the thorniest problem facing the economy, would be huge. Boosting home prices by the 15% to 25% that Barclays Capital reckons many households are underwater “would in all likelihood be prohibitively expensive in economic and social terms,” says the firm.

That underlines the third concern. Success in nominal GDP targeting would probably mean ignoring the Fed’s current mandate on price stability. If the central bank were to even consider such a dramatic shift, Congress may want its say on the matter.

We favor NGDP targeting precisely because we don’t favor targeting specific sectors like housing.  The market should determine where the extra spending goes.

I’m tempted to say “The dual mandate; it’s not just a good idea, it’s the law.”  The WSJ might not like the actual mandate, but wishing it wasn’t there won’t make it go away.   Of course you don’t want the Fed to literally target two variables; that would create a mess.  They should target NGDP.  But they should do so because they care about economic losses created by inflation (actually NGDP growth) and unemployment.  The Congress is telling them which problems to address; they let the Fed decide how to actually implement those vague policy goals.  NGDP targeting is far more consistent with the dual mandate than inflation targeting.

Is that all they got?  Then I’m even more confident about the merits of NGDP targeting.  OK, back to grading.

PS.  I don’t have time to comment on all the stuff that has come out recently, but here are some pieces worth reading:

1.  Clark Johnson has an outstanding analysis of the Great Recession.  (Although I’d quibble slightly with his discussion of exchange rates and policy coordination.)

2.  Add Interfluidity to the list of NGDP targeting supporters.

3.  And Bennett McCallum remains the most respected NGDP advocate in the entire world (even after a certain high profile conversion.)

HT:  Marcus Nunes


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90 Responses to “Occupy the Wall Street Journal”

  1. Gravatar of Bennett McCallum – grandfather of Market Monetarism « The Market Monetarist Bennett McCallum – grandfather of Market Monetarism « The Market Monetarist
    24. October 2011 at 07:14

    [...] Sumner in a blog post today calls Bennett McCallum “the most respected NGDP advocate in the entire world”. I [...]

  2. Gravatar of Morgan Warstler Morgan Warstler
    24. October 2011 at 07:45

    Stop ignoring my winning argument. It keeps getting closer and closer, just accept it and move on.

    The WSJ says “After all, the economy’s real potential growth rate has been slowing for decades.”

    THAT IS their issue.

    Which is WHY 4% is the highest possible NGDP target you’ll get.

    Look EVERYBODY is doing a basic calculation on this:

    If RGDP is under 3%, we’ll be on the hook for 3% inflation. NON-STARTER.

    That’s why GS said 4.5%, because they FORSAW the WSJ concern.

    The same logic leads to my argument and wins the conservatives over.

    Say it is a 4% NGDP level target, now the WSJ thinks, “hey great, anytime we only get 2% growth, the Fed has to keep inflation down to 2%. And IF we get over 3%, that year the Fed has to keep it down under 1%.”

    This is HARD MONEY. This is KING DOLLAR.

    Stop pretending you can’t win over the WSJ, and you don’t understand what their concern is.

    If you just show them that your policies would have lead to tighter money over the past decade, and they would have, EVERYONE will start to see how this is really a very conservative policy.

    Look, the bulk of my friends / business associates are libertarians / Tea Party and they get forced to listen to me go on and on about how since we aren’t going to get a gold standard and we aren’t going to End The Fed, we can level target 3-4% starting now, and basically neuter the Fed.

    And you know what?

    That’s a winning argument.

    Scott, you need to accept, that the glory of your idea might not be what it does int he next two years, but what it keeps from happening five years from now.

  3. Gravatar of Benjamin Cole Benjamin Cole
    24. October 2011 at 07:58

    A peevish fixation on inflation, and an unhealthy obsession with commodities prices—-in addition to simple anti-Obamaism—-defines everything the WSJ says these days.

    Sumner is correct: The WSJ reasoning in this said piece is opaque, partisan, banal—-no reason at all.

    The decline of one of the nation’s great newspapers is a tragic story. There are few enough insightful publications as it is—-one reason we turn to Scott Sumner, and lucky we are to have this option.

    I gave up my subscription to the WSJ after being a reader for more than 40 years.

  4. Gravatar of Mike Sandifer Mike Sandifer
    24. October 2011 at 08:05

    Scott,

    What else would you expect from a News Corp-run enterprise? It’s been made painfully obvious that it’s just a far-right wing propaganda operation literally run by criminals.

    Do you honestly think they’d recommend any policy that would help the economy while Obama’s in office, even if they thought they had one?

  5. Gravatar of Morgan Warstler Morgan Warstler
    24. October 2011 at 08:05

    Interfluidity gets is almost entirely ALL wrong.

    Panties show here:

    1. thinks it has something to do with MMT – government is the boss, mobs run monetary policy.

    2. doesn’t even grasp that Ron Paul would grab 3% level target NGDP and run down the field and spike the ball.

    3. doesn’t get that when you run say 4% level target ANY INFLATION very likely leads to pushing private spending to crowd out borrowing over public spending. Indeed it does lead to gutting public employees.

    I suspect that if you REMOVE the gains that the public employees made since 1998, you’d see NGDP came right in at 5%, instead of 5.7%.

  6. Gravatar of Kelly Evans Kelly Evans
    24. October 2011 at 08:50

    Scott,
    If I may, as the author of said piece in question, respond here, 1) Inflation targeting can’t achieve the “right” level either, but that still doesn’t answer the question of whether there is an objective way to determine what the “right” level of NGDP should be, and whether we ought to trust models which have repeatedly failed to capture the economy’s actual performance with this task; 2) you say if the Fed succeeds it will create wage inflation; yet wages being the last, not first, place inflation shows up, it is a perfectly reasonable question to ask how we get to wage inflation in the first place in the current environment, not least because the run-up in most sensitive prices (commodities among them) acts as a regressive tax on households, undercutting real GDP growth – potentially to the point of recession – and requiring inflation to do even more of the work in raising NGDP. Hence why the real GDP/inflation mix would seem to matter greatly. 3) The Fed’s mandate IS the problem, because the Fed at any time may be meeting one aspect of it while falling short on the other. Replacing it with an NGDP target would currently imply the Fed ought to be far more aggressive in easing policy. Why should we expect that manipulating interest rates and financial markets, as opposed to aiming fiscal measures directly at job creation or principal write-downs, is the best, quickest, or most efficient way of closing this gap, or improving economic performance? Should the Fed not be tasked with a different objective, which is to be countercyclical, not procyclical; that is, to safeguard price stability (and not just consumer-price stability) while fiscal measures are put to work?
    Thanks,
    Kelly

  7. Gravatar of Gene Callahan Gene Callahan
    24. October 2011 at 09:07

    @Morgan: “they get forced to listen to me go on and on”

    Yes, I think we can all picture that.

  8. Gravatar of Thomas Thomas
    24. October 2011 at 09:37

    Wait til you read the NY Times…

  9. Gravatar of Andy Harless Andy Harless
    24. October 2011 at 10:08

    Unfortunately I’m inclined to disagree with McCallum even more strongly than I disagree with the anti-NGDP targeting view. The issue of growth rate targeting vs. level targeting is critical IMO, especially if the target is NGDP rather than inflation. In a world with sticky inflation and smooth productivity growth, NGDP growth rate targeting would imply a policy of ratifying changes in resource utilization so that they become semi-permanent (that is, until the horizon where the assumptions of sticky inflation and smooth productivity growth fail). Monetary policy should lean against changes in resource utilization, not with them.

  10. Gravatar of Becky Hargrove Becky Hargrove
    24. October 2011 at 10:20

    Benjamin,
    40 years? I had thought you were a little younger. WSJ really started going downhill about five years ago, especially when they changed the format and turned thorough stories into little blips.

  11. Gravatar of Carl Lumma Carl Lumma
    24. October 2011 at 10:36

    What happened? News corp happened – where have you been?

  12. Gravatar of marcus nunes marcus nunes
    24. October 2011 at 10:39

    Andy
    I completely agree with your argument against rate targeting. THAT can (almost surely) bring instability. McCallum should consider Hetzel´s “LAW with credibility”!

  13. Gravatar of JimP JimP
    24. October 2011 at 10:42

    http://www.zerohedge.com/news/sudden-crude-backwardationtelegraphing-imminent-easing-episode-fed

    I take this observation from ZH that whatever deflation the WSJ may want the markets expect a more aggressive Fed.

  14. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    24. October 2011 at 10:43

    Kelly Evans, (with whatever respect is due) your reply to Scott is every bit as intellectually confused as your original piece. Closer to a string of bumper stickers than a coherent argument. Taking at random:

    ‘…doesn’t answer the question of whether there is an objective way to determine what the “right” level of NGDP should be…’

    That’s the old mistake of making the perfect the enemy of the good. Surely some levels of NGDP are better than others.

    ‘…wages being the last, not first, place inflation shows up…’

    A dubious assertion, but, even if true, obviously we could still get to wage inflation eventually through monetary expansion.

    ‘Why should we expect that manipulating interest rates and financial markets…’

    No one is arguing for that, certainly not Scott. He’s as hostile to the idea of conducting monetary policy with a focus on interest rates as Milton Friedman was.

    ‘…to be countercyclical, not procyclical…’

    I’m guessing you don’t even know what that means, but if you think you do, explain why targeting NGDP couldn’t be counter cyclical.

  15. Gravatar of Becky Hargrove Becky Hargrove
    24. October 2011 at 10:46

    Carl,
    I heard about News corp every day on the news but was offline for a long time and haven’t subscribed to WSJ for a while. Am determined to remain online now.

  16. Gravatar of Jeff Jeff
    24. October 2011 at 11:42

    @Kelly

    Why should we expect that manipulating interest rates and financial markets, as opposed to aiming fiscal measures directly at job creation or principal write-downs, is the best, quickest, or most efficient way of closing this gap, or improving economic performance?

    Because historically monetary policy works and fiscal policy doesn’t.

  17. Gravatar of The WSJ has “deflated expectations” for the economy | Historinhas The WSJ has “deflated expectations” for the economy | Historinhas
    24. October 2011 at 12:05

    [...] go into detailed comments on the “errors of interpretation” they make (I see Scott has done a post to answer back), and just elaborate on this specific argument (which really invalidates any attempt [...]

  18. Gravatar of ssumner ssumner
    24. October 2011 at 12:07

    Morgan, You need to realize that the WSJ doesn’t care about inflation. They’ll demand 6% NGDP growth as soon as Obama is out of office.

    Benjamin, I agree.

    Mike, Didn’t News Corp endorse Tony Blair?

    Morgan, Yes, the MMT stuff didn’t win me over.

    Kelly, I’m having trouble matching your comment with the editorial in the WSJ. You said the NGDP target violates the Fed’s price stability mandate. Now you seem to be saying the price stability mandate is a bad idea. At least I think you are saying that:

    “If I may, as the author of said piece in question, respond here, 1) Inflation targeting can’t achieve the “right” level either,”

    So what’s the problem with switching to NGDP?

    Then you say:

    “2) you say if the Fed succeeds it will create wage inflation; yet wages being the last, not first, place inflation shows up, it is a perfectly reasonable question to ask how we get to wage inflation in the first place in the current environment, not least because the run-up in most sensitive prices (commodities among them) acts as a regressive tax on households, undercutting real GDP growth – potentially to the point of recession”

    I can’t make heads or tails of this. The Fed boosts prices by increasing AD, not reducing AS. If AD rises then commodity prices may go up in real terms, because real output is rising and commodity prices are highly cyclical. But that would be a reflection of success, of rising incomes. If commodity prices rise for non-monetary reasons (Libya, China), then that may indeed reduce growth, but that has nothing to do with monetary policy.

    You said;

    “Replacing it with an NGDP target would currently imply the Fed ought to be far more aggressive in easing policy. Why should we expect that manipulating interest rates and financial markets, as opposed to aiming fiscal measures directly at job creation or principal write-downs, is the best, quickest, or most efficient way of closing this gap, or improving economic performance? Should the Fed not be tasked with a different objective, which is to be countercyclical, not procyclical; that is, to safeguard price stability (and not just consumer-price stability) while fiscal measures are put to work?”

    Why wouldn’t fiscal stimulus be just as inflationary as monetary stimulus? And to the extent that NGDP targeting differs from price level targeting, it is because NGDP targeting is MORE countercyclical.

    And I don’t understand the fiscal policy reference. In your editorial you talk about the problem being a slowdown in real potential growth. How does fiscal stimulus fix that? Are you coming from an RBC perspective, or a Keynesian perspective?

    Andy and Marcus, I agree on level targeting.

    Patrick, Those are also good responses.

  19. Gravatar of Bill Woolsey Bill Woolsey
    24. October 2011 at 12:18

    Kelly:

    Sumner didn’t say that an expansion of nominal GDP will raise wages first.

    What he said was that it would raise product prices first and lower real wages. This is very much like what you said in the article.

    However, Sumner says that this will increase the quantity of labor demanded, and increase employment. Firms pay the same for labor and sell their products for more. This raises their profits and motivates them to produce more, sell more, and hire more. While the real incomes of those currently employed may fall, the real incomes of those currently unemployed will increase as they become employed.

    Regardless, it is unlikely that expected inflation and lower real wages will cause a reduction in the nominal expenditures of employed households. This is nominal expenditure targeting. The most likely scenario is that they will spend more money and buy close to the same. Unless until real wages pick up.

    Sumner is very much attached to the “sticky wages are the problem” approach. More generally, an increase in nominal GDP to the targeted growth path raises real expenditures, real demand, real output, real income, and real employment. If prices didn’t change at all, then these increases in real output and real income would be proportional to the increase in nominal GDP. Realistically, prices will rise to some degree as well. And so the increase in real income and real output, and employment will be less than in proportion to the increase in nominal GDP. This “less than in proportional increase,” is not a complete offset. Further, nominal incomes and nominal expenditures rise.

    Of course, if the increase in prices is proportional to the increase in nominal GDP, then there is no increase in real output or real income. Nominal GDP rises and leaves real output and employment unchanged. But this is not because people can’t afford to increase spending because of the inflation. The problem would be that firms don’t find it profitable to expand to increased sales by producing more. Most economists (including me) would interpret this as a drop in the potential income. In other word, productive capacity has dropped.

    It this scenario, growing nominal GDP results in shortages of key resources. It could be some types of labor, machinery, energy…
    Those prices rise, and so costs rise, such that it isn’t profitable to expand production and employment.

    While the CBO estimates of potential output do show a substantial drop in productivity capacity, real GDP remains about 7% below capacity. And so, by that estimate, there is much room for firms to earn more profit by expanding output and employing more workers.

    And that is what those advocating shifting GDP to a higher growth path, something closer to where it was in 1984-2007, expect will happen.

  20. Gravatar of Mike Sandifer Mike Sandifer
    24. October 2011 at 12:18

    Scott,

    From the little I’ve read, News Corp has such a powerful media presence in the UK that politicians fall all over themselves to stay more or less in its good graces. Or, at least that was the case before the scandals.

    When I refer to News Corp being a propaganda arm, I’m referring to leaked memos that had Fox News talk show hosts using Republican party talking points. I also refer to their obvious conservative bias.

    That’s not to say that CNN and CNBC aren’t awful, for example. There are perhaps good business reasons to be the only large conservative general news network, but I think it’s clear News Corp can’t be trusted as a news source.

  21. Gravatar of Morgan Warstler Morgan Warstler
    24. October 2011 at 12:36

    “Morgan, You need to realize that the WSJ doesn’t care about inflation. They’ll demand 6% NGDP growth as soon as Obama is out of office.”

    Uhm, I taught you this.

    We are on to lesson #2, please keep up!

    Lesson #2: if the NGDP level target is <4%, the WSJ will consider that a best approximation of HARD MONEY, and they will SEIZE the opportunity to lock in low, low inflation going forward – even if Obama is in office.

    Why do you folks struggle with the basic reality that level targeting NGDP and Hayek/Paul approach to Monetary policy is EASY TO DO????

    Just drop it to the historical 3% RGDP, which means historically 0% inflation – and they will grudgingly adopt your ideas!

  22. Gravatar of Morgan Warstler Morgan Warstler
    24. October 2011 at 12:37

    Woolsey, why did you switch from 3% to 5%????

  23. Gravatar of David Pearson David Pearson
    24. October 2011 at 13:05

    Scott,

    “If AD rises then commodity prices may go up in real terms…”

    …as a result of inflation hedging behavior. Actors purchase forward tradeables and store them to maintain the purchasing power of their currency when inflation expectations rise. This results in real increases in commodity prices. Therefore, realized inflation is typically an average of real increases in tradeables prices and real declines in non-tradeables.

  24. Gravatar of Catherine Catherine
    24. October 2011 at 13:10

    Scott Sumner wrote: ***I’m tempted to say “The dual mandate; it’s not just a good idea, it’s the law.”***

    I will just go ahead and say it.

    The dual mandate.

    Not just a good idea, it’s the law.

  25. Gravatar of Lars Christensen Lars Christensen
    24. October 2011 at 13:10

    Kelly Evans, tell if the Fed can not determine NGDP then you do not believe that MV=PY holds up…tell me, did you ever read Milton Friedman? Or is that not read at the Journal anymore??

  26. Gravatar of JimP JimP
    24. October 2011 at 13:14

    Kelly Evans:

    I would like to thank you for coming to this blog and explaining your views. This shows a willingness of the MSM to engage with sites like this, which can be very very good for the national debate. I encourage you and your colleagues to come back.

    Please keep in mind that the WJS has an audience reach orders of magnitude larger than this blog – and should you be in any way convinced by the arguments made here, no-one will know of your (changed) opinions unless you tell them so in the pages of the Journal. Even if only indirectly.

  27. Gravatar of JimP JimP
    24. October 2011 at 13:17

    Kelly Evans

    By coming here to debate us you have shown far more character than Krugman or DeLong. They read this blog but they would never deign to comment here.

  28. Gravatar of Kelly Evans Kelly Evans
    24. October 2011 at 13:58

    Scott,
    The very difficulties experienced with trying to determine a “right” inflation level should give pause to any efforts that try to determine a “right” NGDP level, or any other metric, for that matter. As for NGDP in particular, to extrapolate its historical trend as the basis for what it should be seems a risky maneuver. The mix between real GDP and inflation also seems critically important, particularly with regard to its effects on employment. Has the logic of using inflation to try and reach “full” employment not been exhaustively rejected? Has the past year’s experience not demonstrated that it is precisely the lags between price and wage inflation that may interfere with the Fed’s ability to generate a sustained increase in the general price level? Not to mention the U.S. is not a closed system, which further interferes with the actual inflationary outcome and what theory suggests should happen, and that ultimately it is not the price of money but demand for it which is the issue plaguing the U.S. economy. That is why I referred to fiscal policy, because it could be far more effective here. Perhaps it is not Congress which should task the Fed but the Fed which should task Congress with an NGDP target (if you will).

  29. Gravatar of johnleemk johnleemk
    24. October 2011 at 14:27

    Kelly Evans,

    “Not to mention the U.S. is not a closed system, which further interferes with the actual inflationary outcome and what theory suggests should happen, and that ultimately it is not the price of money but demand for it which is the issue plaguing the U.S. economy.”

    Two points:

    1. Australia and New Zealand are markedly open economies and yet they have had no problems at all managing their monetary policy. Switzerland had no problems when it wanted to devalue its currency. If these countries aren’t open economies, what is?

    2. The price of money is not the issue, but demand for money is? Isn’t one of the very first things we learn in economics that demand and price for a good are directly related?

  30. Gravatar of Steve Steve
    24. October 2011 at 14:31

    A couple of points:

    * This article is in the “Markets” section, except that it’s clearly an opinion piece. I learned in journalism that news could present the properly cited opinions of others, but not the opinions of the author. If I’m wrong and the “Markets” section is also opinion, please correct me.

    * Kelly Evans appears to be [in her] mid-20s [I deleted part of this comment]

    http://wlunews.wordpress.com/2009/01/27/wl-alumnas-economic-reports-on-the-wsjcom/

    http://www.economicpolicyjournal.com/2010/12/forecast-kelly-evans-will-be-blonde.html

  31. Gravatar of ssumner ssumner
    24. October 2011 at 14:50

    Mike, Fair point, I was just trying to point out that News Corp isn’t about conservatism, it’s about money. If endorsing Blairism makes money, they will do it. But I’m not going to argue there’s no bias at the WSJ.

    Morgan, I think Woolsey was describing how I should sell my policy. He still favors 3%.

    David, They won’t speculate in commodities unless they think they’ll be worth more next year. And they won’t be expected to be worth worth more next year (following monetary stimulus) unless it’s expected to lead to higher real growth.

    Catherine, Yes, that’s more like it.

    JimP, Yes, I should have been more polite and complimented her on posting here. Reporters rarely leave comments.

    Kelly, As I said to Jim, thanks for commenting here, that shows class.

    You said:

    “The very difficulties experienced with trying to determine a “right” inflation level should give pause to any efforts that try to determine a “right” NGDP level, or any other metric, for that matter.”

    Any monetary policy will produce some sort of path for NGDP, prices, etc. All I’m arguing is that a stable growth of NGDP does the least amount of damage, lets the market allocate resources most effectively. I’ve never argued 5% is necessarily “right”, I’ve argued we shouldn’t have suddenly reduced NGDP growth (which is income, after all) right in the middle of the mother of all debt crises. And they’d been delivering 5% for decades, so it seemed like a number with which the Fed was comfortable.

    You said;

    “Has the logic of using inflation to try and reach “full” employment not been exhaustively rejected?”

    Perhaps, but I don’t advocate inflation, I advocate faster NGDP growth. And during the past year NGDP growth has been quite slow.

    I don’t follow your argument about lags; I would think the Fed wants prices to rise faster than wages during the recovery–as it would reduce real wages and boost employment. But again, I don’t focus on inflation, I focus on NGDP, which is growing quite slowly. So there is no lag problem because as far as I’m concerned monetary policy hasn’t been effectively very stimulative.

  32. Gravatar of Bob Murphy Bob Murphy
    24. October 2011 at 14:56

    Well you guys have done a good job making Ms. Evans feel like one of the boys. Some might have exercised some courtesy in deference to a lady, but there is obviously no sexism at this blog.

  33. Gravatar of John John
    24. October 2011 at 15:01

    Scott,

    Won’t a set NGDP growth trend fail to restore employment for the same reason that inflation is no cure for unemployment, people adapt their plans to it?

    I’m still not clear on what the difference between faster inflation and faster NGDP growth would be right now. If real GDP is at 1% right now we’d need 4% (core) inflation to hit 5%.

    Do you want to return NGDP to 2007 trend levels?

    I don’t think you ever addressed any of my concerns about GDP measures in general. The most important objection being that government spending counts as output, which is bogus. Even if you’re right that a private sector spending target would cause the economy to overheat during a war (they should be incentivized to stay out of wars in any case), there is simply no good way to measure a national economy. You can’t really measure inflation accurately either for that matter.

  34. Gravatar of John John
    24. October 2011 at 15:03

    Kelly Evans,

    You show a lot of integrity by coming to debate here. I’ve been debating Scott for a while and he’s as slippery as they come. A master of rhetorical jiu-jitsu. You’re completely right that NGDP is no better than any other attempt at central planning.

  35. Gravatar of JimP JimP
    24. October 2011 at 15:07

    Now we have a real debate here – between Scott and the WSJ view of what to do. One can hardly exaggerate the importance of that.

    And she is one of the boys, is she not?

  36. Gravatar of JimP JimP
    24. October 2011 at 15:17

    John

    You do know that Scott doesn’t like the non-market (central-planning) way the Fed operates any more than you do. A NGDP futures market would remove all discretion from the Fed and would use markets to set monetary policy. You do know that – right?

  37. Gravatar of Ryan Sanchez Ryan Sanchez
    24. October 2011 at 15:31

    John,

    You said, “I’m still not clear on what the difference between faster inflation and faster NGDP growth would be right now. If real GDP is at 1% right now we’d need 4% (core) inflation to hit 5%.”

    Expectations are the key and if the fed %5 level NGDP tomorrow, you would see the public rebalance their portfolios due to the expected increase in nominal spending. People would move out of less risky assets such as cash and treasuries into higher yield corp debt, equities etc. The improved position of balance sheets and the promise of higher nominal growth will in the future will lead to investment and expenditure today. This will create higher real GDP today and negate the need for 4% core inflation to reach a 5% target.

  38. Gravatar of dwb dwb
    24. October 2011 at 15:37

    its sad what passes for “reporting” over at the WSJ these days. I wish I could get paid what thet reporter gets paid for being so lazy.

  39. Gravatar of dwb dwb
    24. October 2011 at 15:50

    This article is in the “Markets” section, except that it’s clearly an opinion piece. I learned in journalism that news could present the properly cited opinions of others, but not the opinions of the author.

    yeah, i used to think that too. Many times I’ve emailed reporters to complain about the lack of balance and correct significant omission errors. that was then. Each and every time I basically got back to the effect “this piece was meant to show the perspective of x.” Not just WSJ, but Bloomberg and others. “perspective?” really – doesn’t that belong on the oped page? Nowadays if i want balance I read two sources, at least one on the left and one on the right (and a few in between). what really irks me is the sheer laziness of some of the reporting though. Like they can’t do a simple Google search!

  40. Gravatar of Cthorm Cthorm
    24. October 2011 at 16:11

    John – the difference is symmetry. With a monopoly on money creation in the US, the Fed has all of the theoretical power to create untold inflation, but inflation targeting is a blunt instrument. With inflation targeting it’s not as if there is an offsetting promise of disinflation once growth picks up; even if there was, it would be difficult to disaggregate supply-side factors from policy-driven inflation. With NGDP targeting you use a more easily measured metric while at the same time putting in a credible guarantee to disinflate and inflate proportionally to meet the level target. The expectations worry that the Fed will not unwind its increases to the monetary base disappears.

  41. Gravatar of JimP JimP
    24. October 2011 at 16:18

    Kelly Evans:

    You should really read and think about this paper – linked to earlier in this post.It deals with many of the things you say. Read it and think about it. And remember the influence your views have because of the reach of the organ you publish them in.

    http://shadowfed.org/wp-content/uploads/2011/10/McCallum-SOMCOct2011.pdf

  42. Gravatar of Wall Street Journal Editorial Page Nonsense Watch « Uneasy Money Wall Street Journal Editorial Page Nonsense Watch « Uneasy Money
    24. October 2011 at 17:05

    [...] Scott Sumner’s post today about this piece about nominal GDP targeting by Kelly Evans.  Scott [...]

  43. Gravatar of flow5 flow5
    24. October 2011 at 17:20

    Asking whether or not “policy makers could successfully hit it” or whether NGDP targeting is the right prescription seems very clear cut. The rate-of-change in nominal gDp peaked in the 2nd qtr of 2006 & fell sharply for 12 successive quarters (3 whole years). This neatly coincides with the fall in monetary flows (our means-of-payment money Xs its rate-of-turnover) over the same period. For those who need a reminder the equation of exchange is an algebraic way of stating a truism; that the product of the unit prices, and quantities of goods and services exchanged, is equal (for the same time period), to the product of the volume, and transactions velocity of money.

  44. Gravatar of Morgan Warstler Morgan Warstler
    24. October 2011 at 17:25

    John and Kelly,

    Look, there’s a REAL difference between Sumner and all the other central planning.

    And it isn’t Scott’s genius arguing, it’s that he;s AFRAID of saying what it really is… he just won’t go over and kick DeKrugman in the nads.

    Look, to understand Fisher or Sumner (or even Keynes) you have to pay EXCLUSIVE attention to the Ying while everyone else sucks down the Yang like chocolate sauce.

    This is basis slight of hand.

    The ying to Keynes is that public employees can never enjoy “good times” – the state must live in a state of frugality PRECISELY when everyone is getting richer, so that when the winter comes, the public employees are as cheap as they have ever been.

    IF YOU DON’T HAVE Keyne’s Ying, there can be no Yang.

    The ying to Sumner is what happens when we VERY QUICKLY hit 4% level target and keep banging our heads on the ceiling???

    1. The Fed get to aim for zero inflation.
    2. In order to cause “deflationary effects” to push us down under 4%, our government is incentivized to gut public employees – by making government hyper-productive.

    Under Sumner’s regime, and he has ADMITTED this, private investmet will crowd out pubic investment.

    Example: Shutting down the US Postal Service becomes a no brainer.. you get all the deflation of firing 500K public employees and forcing old peope to learn to use the Internet. Technology sector explodes! but overall NGDP?? maybe goes down a bit, so we get even lower rates.

  45. Gravatar of Bill Woolsey Bill Woolsey
    24. October 2011 at 17:27

    Kelly:

    If you assume that the economy is currently in equilibrium, then more rapid growth in nominal GDP might result in lower unemployment in the short run, along with higher inflation, but in the long run, only higher inflation.

    However, if we are in the middle of the reverse process–a massive decrease in the growth path of nominal expenditure, which in the “short run” is generating massively higher unemployment and slightly less unemployment, and that we still hope will generate only a lower growth path of prices in the long run, with unemployment returning to its initial level, then reversing course means that we reverse the slightly decrease in inflation as well as the massively higher unemployment. We no longer are heading for that much lower growth path in the price level.

    Market Monetarism is consistent with the “orthodox” monetarist understanding of the phillips curve.

  46. Gravatar of David Pearson David Pearson
    24. October 2011 at 17:35

    Scott,
    If you are a purchasing manager, you will pre-buy inventory when the cost of carrying it is less than the expected price increase (all else equal). There is no variable for real growth in that equation.

  47. Gravatar of Benjamin Cole Benjamin Cole
    24. October 2011 at 17:45

    Becky Hargrove–

    I hope you see this. Well, I am exactly (almost) Scott Sumner’s age. Why would you think I am younger or older? Something about my pixels? I started reading WSJ as a teenager, always liked it. And yes, in the last five years, it has tailed off.

  48. Gravatar of David Pearson David Pearson
    24. October 2011 at 18:02

    Ryan Sanchez,
    If “rebalancing” is the dominant dynamic, then why are term and equity premiums higher under high rates of (inflation-driven) nominal spending? How does your model produce rebalancing towards equity and corporate debt when NGDP expectations are rising, and still account for rebalancing away from those instruments when NGDP expectations are rising too fast?

  49. Gravatar of Bonnie Bonnie
    24. October 2011 at 18:29

    The WSJ is a rag. This article is case in point because it seems to favor inflation targeting, and the author suggested that fiscal policy should fill in the gaps. These two policy prescriptions cancel each other out, having little other effect than to add to the national debt and tax burden. We’ve been down that road and it hasn’t worked.

    Just a few minutes of looking into the cause of the price changes of the last couple of years, you can get the idea that there are supply side issues that are likely responsible for the lion’s share of rise in prices, oil and corn being among them. Yes, they are commodities and are affected by monetary policy, but a quick look at the prices of them compared to others over the last decade or so will show that there’s something else affecting these besides monetary policy in a rather dramatic way.

    We have an ultra-serious issue with energy prices, which are very sensitive to changes in demand. I’m curious about whether Ms. Evans believes that tightening down the screws on monetary policy to hold down demand, completely ignoring the employment part of the mandate, is the proper policy prescription to keep gas prices in check. To this very interested observer, it would be far better for our government to get its act together concerning energy policy than to trade off high unemployment for less pain at the pump.

  50. Gravatar of Nic Johnson Nic Johnson
    24. October 2011 at 18:56

    You need to start the NGDP-Targeting club; the compliment to Mankiw’s Pigou club.

    Why aren’t you leading more? (I know you have grading at this moment, but in general)

  51. Gravatar of John John
    24. October 2011 at 19:45

    Jim P,

    I have read about Sumner’s plan for the futures markets. I think he knows it’s the only way that the plan to consistently hit 5% NGDP might work and it’s also not gonna happen. The Fed and government (the same thing really) rarely or never relinquish power unless there’s a real public uprising which I don’t see happening over an issue as technical as whether to rely on an NGDP futures market as the primary instrument of monetary polciy.

    Ryan Sanchez,

    Or they might start spending more rapidly in anticipation of higher inflation causing capital consumption (the source of economic regression) and further inflation that the Fed can’t control except by inducing a recession leading to a pendulum in NGDP figures. It’s also worth pointing out that if people decide to save less because of the higher nominal spending, real GDP growth will be limited since savings are the real source of all economic improvements (even technological advances require increasing pools of savings).

    Morgan,

    Fischer, Sumner, and Keynes all believe(d) that economic prosperity is based on the total volume of spending. This belief in a false correlation leads them to terrible policy conculsions like “boosting aggregate demand.” Aggregate demand is nothing more than aggregate supply expressed in money; a meaningless term yet it is used as an excuse to rob the value of people’s savings and introduce chaos into the entire market system through the distortionary effects of inflation and government spending. There can be no compromises or agreements between me and anyone who follows that approach.

  52. Gravatar of John John
    24. October 2011 at 19:50

    Morgan,

    I also believe in property rights and that leads me to the conclusion that a government monopoly on the printing press as well as fractional reserve banking are wrong. In the realm of ideas, I believe in principles not pragmatic approaches. I have no plans on being a politician. Scott is a good example of someone who believed and pushed a certain principle.

  53. Gravatar of John John
    24. October 2011 at 20:25

    Morgan,

    How did you put your picture up so that it shows up when you comment? I don’t like being anonymous out here.

  54. Gravatar of Morgan Warstler Morgan Warstler
    24. October 2011 at 20:59

    “There can be no compromises or agreements between me and anyone who follows that approach.”

    “In the realm of ideas, I believe in principles not pragmatic approaches.”

    Yah, been there done that. Before the Internet, it was a BBS called The Well, and then Wired Threads (and our renegade splinter Group NewsTrolls), and then Electric Minds… yada yada.

    John, I love ya, but dude it isn’t purity you preach, its passivity.

    The shortest distance to libertarian thought is creating political situations that destroy the one true cancer of democracy: have-nots voting to get free-shit. As long as they get nothing, they will eventually become dejected and give up on the incompetents that rile them up rather than work for a living.

    Once the have-nots, public employees, and finally the inheritance poodles live in and accept totally their passive and docile roles, we will have come as near to the libertarian end game as we’re going to get outside of Sci-Fi.

    A real property-rights libertarian sacrifices purity and stomachs immense amounts of gut wrenching lesser moral shit to topple the greatest moral issue of all: taxation as theft.

    Either, it is tragedy of such proportions that you will go black hat to win, or it isn’t really that big a deal.

    No matter what the bleeding hearts say, libertarians are not conscientious objectors, they are not Gandhi.

    btw, the truest hero of Ayn Rand’s work was Ragnar Danneskjöld.

  55. Gravatar of Morgan Warstler Morgan Warstler
    24. October 2011 at 21:01

    sign up for wordpress

  56. Gravatar of John John
    24. October 2011 at 21:15

    Morgan,

    Fair enough. I like the Ayn Rand reference. I see more aggressive monetary policy as the only way the government can possibly pay for our present big government welfare-warfare military empire state. I think monetary policy supports socialism and militarism; the gold standard forces governments to pay for things honestly and in a democratic way. I’m not sure that NGDP targeting would do that or that the Fed would relinquish power and let futures markets handle money. That said I like the 3% idea better than Scott’s 5.

    Here’s a bold prediction about monetary policy. Interest rates will stay low for at least another 10 years. How else is the government gonna keep paying interest on the
    debt? There’s no way they can let rates rise and anyone who thinks the Fed is independent is a fool.

  57. Gravatar of John John
    24. October 2011 at 21:41

    It occurs to me that people massively distort things in these comments by saying thugs like the recession knocked us massively off our growth path (Woolsley); look at an NGDP graph. There was a slight dip then the economy has basically been growing at historical rates. It isn’t that we’ve been massively knocked off our growth path, we just haven’t had a robust recovery that makes up for the recession. The NGDP graph doesnt show anything a disinterested observer would describe as massive.

    Another common exaggeration I hear is the idea that we’re facing the danger of inflation. We’ve barely even had disinflation since 2008 and the headline CPI has been over 3.5% for around a year now. Hardly the deflationary death spiral people seem to talk about.

  58. Gravatar of Rien Huizer Rien Huizer
    25. October 2011 at 00:43

    Scott,

    All of Mr Murdoch’s media worldwide seem to be in often hysterical anti gvt propaganda mode (maybe not in the UK, but unfortunately that gvt is in a difficult position). And where they do not have coverage, like in Europe, they are simply against the present EU/EUR in those countries where they have a position. There must be some value in this.

    Two things: (1) the better News papers have converged towards the traditional political (and moral) partisanship of the tabloids (apologies to the current WSJ) and the Fox/Sky news brands as this piece demonstrates and that may be good business but also (2) Murdoch personally (He wrote this as you know very well, not Ms Evans) is very good at picking political winners, people or issues and that he knows how to develop political potential. A highly talented individual.

    What does that mean for NDGP level targeting: if the present administration supports it, it will not survive the election. It may even be tainted with socialist associations..Good ideas deserve a better fate. Wait for .. Perry? Who else?

  59. Gravatar of Nichol Nichol
    25. October 2011 at 03:34

    Isn’t GDP is a measure for the size of the whole economy, which has to grow at least along with the population size to keep average incomes constant? Would it not make more sense to divide by the population size to get the growth of NGDP per capita? If population growth slows down, as it should now, in the medium term, a lower growth of GDP is needed to still allow opportunities for personal growth.

  60. Gravatar of Morgan Warstler Morgan Warstler
    25. October 2011 at 03:48

    Rick Perry:

    “My plan freezes federal civilian hiring and salaries until the budget is balanced.”

    http://online.wsj.com/article/SB10001424052970204777904576651330270547222.html

    “The mind-boggling complexity of the current tax code helps large corporations with lawyers and accountants devise the best tax-avoidance strategies money can buy. That is why Cut, Balance and Grow also phases out corporate loopholes and special-interest tax breaks to provide a level playing field for employers of all sizes.”

    ——

    Note here, Matty our tard on the Potomac FINALLY finds something he dislikes about Europe:

    http://thinkprogress.org/yglesias/2011/10/24/352064/italys-small-business-problem/

    He’s brainless.

  61. Gravatar of Bill Woolsey Bill Woolsey
    25. October 2011 at 04:28

    John:

    You are looking at growth rates.

    Look at the growth path.

    Nominal GDP is growing, but it is 14% below the growth path of the the Great Moderation.

    In my view, excessive focus on growth rates is a problem. It works OK if you stay in equilibrium. But when you are far from equilibrium, it creates absurd notions like everything is OK.

    Suppose government revenues are growing 2% per year. The government doubles tax rates. Suppose further that real output falls by 20% and tax revenues fall by 5%. Then, from that lower level of output and tax revenue, production begins rising as before, as does tax revenue.

    What is the problem? Production and tax revenues are growing like before, right? Oh, real output is 7% below where it is? Tax revenue is still slightly less too? But it is growing…

    After a few years, real output and tax revenues are past where they were. They are both growing. Everything is just fine now. How can you say that the doubling of tax rates had a bad effect on the economy?

  62. Gravatar of Bill Woolsey Bill Woolsey
    25. October 2011 at 04:52

    Here is a link to a blog article which includes some diagrams of both growth rates and growth paths. In the first diagram, the growth path of the great moderation is shown, as well as the current growth path. There is a 14% gap.

    There is a proposed alternative based upon, as you say, a strong recovery.

    http://monetaryfreedom-billwoolsey.blogspot.com/2011/10/more-on-reaganite-monetary-policy.html

    There are also some growth rate diagrams.

    P.S. You should really reconsider the fractional reserve banking is fraud business. It is really nonsense.

  63. Gravatar of W. Peden W. Peden
    25. October 2011 at 05:37

    Nichol,

    “Isn’t GDP is a measure for the size of the whole economy”

    No. It’s at best a proxy for that, since GDP measures neither wealth nor net transactions, but rather the production of final goods in a given time-period.

  64. Gravatar of Morgan Warstler Morgan Warstler
    25. October 2011 at 06:04

    Bill, you make a fundamental mistake.

    In the first instance, John speaks of, what doesn’t matter is that we’re below “where we could be.”

    What matters is that the guys who got out early, who pulled their cash, grabbed a chair when the music stopped, that they get to buy up everything cheap – and that the losers who flew to close to the sun, couldn’t pull themselves away, that they get gutted like fish.

    In the second instance, when the government is involved, the ONLY thing that matters is that we’re below where we could be.

    Government / Society is an equal amongst free market men, it is subservient.

    Every time a bunch of economists start pointing at graphs and talking about what was lost, they mean what “society” lost in the aggregate – and that is meaningless compared to seeing the losers drummed into the streets to wail the dirge for all to hear and see.

    Economists that don’t relegate the government’s view of the aggregate to secondary status, are not really economists.

  65. Gravatar of flow5 flow5
    25. October 2011 at 06:35

    “It’s at best a proxy for that, since GDP measures neither wealth nor net transactions, but rather the production of FINAL GOODS in a given time-period”

    That’s why the FED ignored the housing boom. The inflationary impact of these money flows is not revealed by either the gDp deflator, producer, or consumer price indexes. These indexes reflected, in only a marginal amount, the inflation that took place in real estate. Soaring real estate prices were “validated” by these enormous flows. Rampant speculation and a deluge of irresponsible borrowing & lending have, as a consequence, characterized the industry.

  66. Gravatar of W. Peden W. Peden
    25. October 2011 at 07:11

    Flow5,

    I’ve been coming around to thinking that way, and I’m glad I’m not the only one that thinks that it was more than coincidence that the explosions of US deposits in the late 1990s and even moreso in the early 2000s were followed by asset price bubbles. As you say, even the best price indexes like the GDP deflator do not measure aggregate price increases. The volume of transactions is a vastly bigger matter than the production of final goods.

    It’s MV = PT, not MV = NGDP. We can get big increases in M over a sustained period without a big increase in NGDP, but that doesn’t tell us about the effects of that increase in M on P or T.

    This is one of the reasons I do not believe that NGDP targeting (whatever its other virtues may be) is a cure for asset price bubbles.

  67. Gravatar of Dustin Dustin
    25. October 2011 at 07:14

    “P.S. You should really reconsider the fractional reserve banking is fraud business. It is really nonsense.”

    – good luck with that, Professor Woolsey. {Fractional reserve banking = fraud} is an article of faith amongst the devotees of the Rothbardian Religion.

  68. Gravatar of Becky Hargrove Becky Hargrove
    25. October 2011 at 07:55

    Benjamin Cole,
    They say that when we get to be a certain age, it’s like there’s a flip switch that goes off. Yours must have gone from less agreeable to more agreeable. Mine went from more agreeable to less – that is I’m a lot more stubborn than I used to be. Perhaps when we’re stubborn at a young age we get to coast more afterwards.

  69. Gravatar of Jon Jon
    25. October 2011 at 08:35

    Scott, I don’t understand you some times–I think maybe frustration is driving your tone. If you don’t like how the WSJ has framed your proposal, submit an op-ed. If they mentioned your ideas in an unsigned editorial, there is a good chance they’ll accept.

    Second, you need to step back and calm down. The critique of ngdp targeting has some plausible basis: an ngdp target by itself does not proscribe the inflation rate. You need to recognize that the concern is reasonable and calmly give your answers:

    1) the mix of real growth and inflation is depicted by the slope of SRAS. The mix of these two is the direct result of government policy (not fiscal policy). This means the end of inflationism. Measures which drive inflation higher will by identity drive real growth lower. Thus, there will be an incentive to reform the regulatory sector so as to raise growth and lower inflation rather than have the two in tension.

    2) income stability matters more than inflation for stabilizing the business cycle.

  70. Gravatar of John John
    25. October 2011 at 09:10

    Bill Woosley,

    I’ve seen those growth path charts and I think they are crap. Utter, useless crap. Like other econometric predictions (Romner and the stimulus plan come to mind) they aren’t worth the paper they are printed on and are a tremendous waste of time for some pretty smart people. The charts from people like Romner and Zandi are always wrong.

    With the growth path charts, they all assume that economic growth in the 2000s was sustainable. Very few economists, not even Paul Krugman, think that it was. It makes no sense to project forward from the middle of a bubble economy and to think that growth should continue like that forever.

    I think it is incredibly silly to try to freeze a certain growth path going forward. No matter what Bernanke tries to do, it is not possible to freeze the economy in its 2007 configuration forever. As Heraclitus says, “You can’t put you foot in the same river twice.”

    An economy sustainably grows based on the pool of available savings and the ability of entrepreneurs to invest those savings in enterprises which serve the most urgent needs of the customers. Two points based on this: these are fluctuating variables which means that trying to lock in growth rates is sure to lead to malinvestments and with low savings rates over the past 10 years and an activist regulatory government, there is good reason why economic growth should be slow in the U.S.

  71. Gravatar of JTapp JTapp
    25. October 2011 at 09:20

    Could it be possible that we have a 5% NGDP target that everyone believes is credible, but everyone may not spend more because they realize most of the increase in their income will never show up as wages but rather go to higher health care premiums? The WSJ piece has me thinking about this.

    Rising nominal income doesn’t necessarily mean rising wages, if health care spending is growing more rapidly than national income (which it is) and 90% of health insurance is provided by employers. While our overall benefits are increasing as employers spend more on our insurance premiums, we don’t see that as an increase in wages. And the health care sector has been a consistent negative on productivity growth.

    Since we spend 1/6 of our GDP on health care, might it make sense that NGDP targeting will only see maximum benefit if we get rid of the supply problems of that sector?

  72. Gravatar of John John
    25. October 2011 at 09:57

    Bill,

    I should be clear that I was talking about the growth path and not present growth rates. Present growth rates are about where they were before but we’ve been knocked below the growth path we were on before 2008. There hasn’t been a period of faster than usual growth to bring us back to our old growth path. I just wanted to be clear that I wasn’t talking past you. I get the point you were trying to make.

  73. Gravatar of John John
    25. October 2011 at 10:25

    Bill,

    I don’t think you understand why I think fractional reserve banking is fraudulent. I think that way because two people have a claim to the same money. That is not how property rights work. You and a stranger don’t have an equal claim to using your car, the bank isn’t allowed to put a random person move into your house, etc. I might not object to fractional reserve banking if it wasn’t mandated by the government. In a free banking system, I think it would be a lot less harmful if it still existed.

  74. Gravatar of Bill Woolsey Bill Woolsey
    25. October 2011 at 12:16

    John:

    You do realize that I am familiar with the arguments of the Rothbardians.

    By the way, fractional reserve banking isn’t required by the government. Many banks offer safe deposit boxes to store currency.

    I don’t think borrowing money and promising to pay it back when requested is the same thing as promising to store money, much less having two people own the same thing. One person has lent to another, but just for just as long as they want.

    You need to understand that Rothbardian’s believe fractional reserve banking leads to malinvestment and rather than restricting freedom of contract to prevent this bad consequence, they twist themselves into mental contortions to claim they really aren’t restricting individual rights because they want to imagine themselves as uncompromising defenders of individual rights. It is a matter of ideology.

    The sensible positions are that fractional reserve banking has bad consequences, but freedom of contract requires that it be tolerated, or else, that fractional reserve banking has bad consequences and freedom of contract should be restricted. Well, I don’t think ordinary banking–funding loans and bonds with monetary liabilities–has bad consequences. Like usual, freedom of contract has good consequences. But if you insist that the consuquences are bad, then either you have to violate freedom of contract or else put up with it.

  75. Gravatar of Bill Woolsey Bill Woolsey
    25. October 2011 at 12:31

    John:

    You are confusing nominal and real growth. I think you are a little bit wrong with your focus on saving and investment as central to growth. The growing labor force is a really important source of growth. Improved techological know how is the key determinant of output per unit of labor. But, saving and investment are necessary. This is particularly true of “gross saving,” which includes depreciation cost. If you don’t replace any existing capital goods, it is hard to see much technological improvement.

    Anyway, all of this can occur and any level of nominal income and output. There is always enough nominal income to buy all of nominal output. There is never a need for people to borrow more to afford nominal output. There is never a need for a high asset prices for people to afford to pay more for nominal output.

    One common error Austrians is this notion that high or rising nominal incomes require extra low interest rates are extra high amounts of lending.

    Higher levels of nominal income do generally result in higher nominal credit supplies, but they also generate higher nominal credit demands. The higher nominal credit supply and matching higher nominal credit demand actually results in unchanged nominal interest rates. Now, if it is about growth rates, then more rapid growth in nominal income goes with more rapid growth in nominal credit supply and more rapid growth in nominal credit demand and higher nominal interest rates.

    I wouldn’t quite try the “even Krugman” agrees argument.

    The Misean approach starts with the assumption that the entire point of monetary expansion is to lower real interest rates and the more rapid growth in nominal income is the process that inteferes with with this goal.

    But the goal isn’t lower real interest rates. The goal is slow, steady growth in nominal expenditure and no change in real interest rates.

  76. Gravatar of John John
    25. October 2011 at 12:33

    Bill,

    The Rothbardian position is that it is illegitimate and therefore doesn’t fall under freedom of contract. Rothbard didn’t write based on utilitarian concerns but as a natural law theorist.

    Like I said, if it comes from a free market outcome, then fine. I don’t think that the practice of fractional reserve would survive very long in the free market system but if it did, fine.

  77. Gravatar of Morgan Warstler Morgan Warstler
    25. October 2011 at 14:46

    I pretty sure fractional reserve works fine as long as collateral is up and leverage is down.

    Banks are just pawn brokers.

    They have a store full of hard assets, they good borrowers eventually come and pick up.

    It the bundling and selling of the loans as performing assets while they have FDIC backing that pisses me off.

  78. Gravatar of John John
    25. October 2011 at 16:24

    Morgan,

    I’m generally inclined to agree but there is something funny about two people having an equal legal claim to the same dollar. Completely agree that the FDIC creates all sorts of moral hazard especially if the banks can play with bundling loans. The markets tried to correct but are getting a lot of resistance from the overlords in Washington.

  79. Gravatar of Richard W Richard W
    25. October 2011 at 18:49

    John
    25. October 2011 at 12:33

    ” I don’t think that the practice of fractional reserve would survive very long in the free market system but if it did, fine. ”

    The market when it is free to choose always chooses fractional reserve. George Selgin points out that 100-percent reserve banking is always a statist construct.

    http://www.freebanking.org/2011/05/31/the-state-and-100-percent-reserve-banking/

  80. Gravatar of Browsing Catharsis – 10.25.11 « Increasing Marginal Utility Browsing Catharsis – 10.25.11 « Increasing Marginal Utility
    25. October 2011 at 19:45

    [...] Occupy the Wall Street Journal. [...]

  81. Gravatar of Scott Sumner Scott Sumner
    27. October 2011 at 05:01

    John, You said;

    “Won’t a set NGDP growth trend fail to restore employment for the same reason that inflation is no cure for unemployment, people adapt their plans to it?”

    Do you believe in the Phillips Curve or not? If not, why was unemployment so high in the early 1930s, when prices fell 25%.

    You said;

    “I don’t think you ever addressed any of my concerns about GDP measures in general. The most important objection being that government spending counts as output, which is bogus.”

    Government activities don’t involve employment?

    David: You said;

    “If you are a purchasing manager, you will pre-buy inventory when the cost of carrying it is less than the expected price increase (all else equal). There is no variable for real growth in that equation.”

    And how does that relate to NGDP targeting?

    Bonnie, You said;

    “The WSJ is a rag. This article is case in point because it seems to favor inflation targeting, and the author suggested that fiscal policy should fill in the gaps. These two policy prescriptions cancel each other out, having little other effect than to add to the national debt and tax burden. We’ve been down that road and it hasn’t worked.”

    Great point, I wish I had made it.

    Nic, You said;

    “Why aren’t you leading more? (I know you have grading at this moment, but in general)”

    I have devoted most of the past three years to fighting for NGDP targeting. Other people seem to think my crusade is going rather well, at least in changing views among pundits, which is the first step in changing policy.

    Nichol, Yes, that’s right, but the slowdown in pop. growth is tiny compared to the slowdown in NGDP growth.

    Jon, I must have mentioned those two points 100 times. You must be new to my blog.

    John, You said;

    “With the growth path charts, they all assume that economic growth in the 2000s was sustainable.”

    That’s a basic EC101 error. Bill’s talking about NGDP, not RGDP.

  82. Gravatar of What Is NGDP? – Real Time Economics – WSJ What Is NGDP? - Real Time Economics - WSJ
    27. October 2011 at 06:18

    [...] [...]

  83. Gravatar of flow5 flow5
    27. October 2011 at 06:59

    W.Peden:

    “It’s MV = PT, not MV = NGDP”….To the Keynesians, aggregate monetary demand is nominal GDP, the demand for services (human) and final goods. This concept excludes the common sense conclusion that the inflation process begins at the beginning (with raw material prices and processing costs at all stages of production) and continues through to the end, etc.

    To those who may question the validity of using transaction data with gDp data, there is evidence to prove rates-of-change in nominal gDp can serve as a proxy figure for rates-of-change in all transactions.

    The (MVt) figure encompasses the total effect of all monetary flows (transactions). As such, new & existing property transactions (i.e., the housing boom-bust), would have been captured (not overlooked).

  84. Gravatar of W. Peden W. Peden
    27. October 2011 at 07:39

    Flow5,

    Agreed, though I am sceptical (in the absence of evidence) that rates of change in NGDP can indeed serve as a proxy for all transactions.

    I am coming to believe that the direction of causation, such as it can be drawn, goes as follows-

    Monetary policy > expectations > asset prices > money supply > PT

    NGDP may or may not be affected by a change in monetary policy. It may well be, for instance, that the increase in the money supply works itself out primarily in T, as it did in the 1990s monetary explosion. Equally, if expectations are not affected by monetary policy (say because it is seen as being non-permanent, like some of the BoJ policies) then there will be no change in asset prices and no change in the money supply.

    Of course, an increase in PT, insofar as it doesn’t work itself out in non-financial asset prices, will itself boost asset prices and therefore create a self-sustaining endogenous increase in the money supply.

    My (very limited) support for this conjecture: I struggle to think of cases where (a) there are major increases in the money supply AND (b) there are no changes, even in the long-run, in NGDP growth rates AND (c) there are no major increases in asset prices. The two historical cases that come to mind (the late 1980s in the UK, where NGDP stayed very close to its trend despite a huge surge in broad money and the late 1990s where NGDP stayed close to a very low trend despite a smaller surge in broad money) are both famous asset-price bubbles.

    I emphasise that I mean sustained money supply movements: short-term inert money supply movements may just be due to distress borrowing, stable expectations, inward/outward flows from one category to another, or due to non-money included in that particular aggregate e.g. non-bank financial intermediary deposits which are swamped by interbank transactions as in 2008.

  85. Gravatar of John John
    27. October 2011 at 08:36

    Scott,

    I believe in limited Phillips Curve effects due to some price stickiness. But since these effects are short term, they aren’t something to base policy on.

    Government activities may involve employment, but there is no way of measuring whether that employment is productive or wasteful.

  86. Gravatar of John Carney Smells a Rat, Too John Carney Smells a Rat, Too
    28. October 2011 at 11:55

    [...] broadsides against the Brawler from Bentley, here and here. We’ll see if Scott plays bad blogger, good blogger with Carney like he did with Kelly [...]

  87. Gravatar of BullseyeMicrocaps.com » Kelly Evans On NGDP Targeting And Sustainable Growth BullseyeMicrocaps.com » Kelly Evans On NGDP Targeting And Sustainable Growth
    28. October 2011 at 13:59

    [...] (To her credit, she has engaged with Scott Sumner on the subject in the comments section of his blog post responding to her column.) While I’m also an advocate of NGDP targeting, and I agree with many of [...]

  88. Gravatar of ssumner ssumner
    28. October 2011 at 18:44

    flow5, If you are interested in transactions, that means you are ignoring NGDP, as almost all transactions are financial, in market like the forex market.

    John, Whether government employment is efficient has no bearing on whether we should target NGDP. The goal of monetary policy is not to make government efficient, it’s to reduce business cycles.

  89. Gravatar of john john
    1. November 2011 at 15:37

    I seldom agree with the WSJ ed page but in this case they are broadly correct surely. Setting a NGDP in of itself achieves nothing, it’s the policy choices that go with it that will produce the claimed outcomes. And at bottom NGDP amounts to setting a target and inflating til you get to it. That GS paper admitted as much. I find it perplexing that monetarists are advocating this course which strikes me as both overly complicated and dangerous. A bit like a throat surgeon removing tonsils via the rectum

  90. Gravatar of Scott Sumner Scott Sumner
    5. November 2011 at 13:05

    John, You are completely wrong. Current AD depends mostly on future expected monetary policy–that’s the whole point.

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