Monomaniacal . . . but in a good way

Ezra Klein recently included this blog in his annual awards:

Most influential-yet-obscure economic blogger: Scott Sumner. Be honest, how many people had even heard of Nominal GDP level targeting before this year? No one. But as the economy stagnated, and policymakers seemed increasingly incapable of mitigating the pain, many analysts started reading Sumner’s blog with interest. So far, the Federal Reserve has rejected his idea for NGDP target—under which the Fed would essentially target a combination of real output plus inflation rather than focus on curbing inflation alone—but the notion has attracted support from everyone from Paul Krugman to Tyler Cowen to Goldman Sachs. And much of that has to do with Sumner’s near-monomaniacal focus on the topic.

Klein presumably included the term “near” as a courtesy; I’m obsessively monomaniacal about NGDP.

Back around 2007 the US had lots of problems; income inequality, a rapidly declining home building sector, and according to some we were already well into The Great Stagnation.  But one problem we didn’t have is high unemployment.  Indeed unemployment was still only 4.9% in April 2008, by which time the great home building crash was already 70% over.

In the long run NGDP is of no importance at all; Japan’s NGDP is nearly 40 times larger than America’s.  But sudden unexpected changes in NGDP matter a lot.  Because nominal wages are sticky, a sudden downshift in NGDP growth will cause fewer hours worked and (except in Germany) a sudden upswing in the unemployment rate.  More than enough reason for me to be monomaniacal about NGDP.

But there’s more, debt contracts are also denominated in nominal terms.  During most recessions that’s not a big problem.  However this time around there were two factors that made the NGDP downshift have a much bigger impact than usual.  First, the decline in NGDP growth was unusually large.  And second, both debtors and financial institutions were already greatly stressed by the sub-prime fiasco, even before the NGDP crash occurred.  The NGDP crash then made the debt crisis much worse.

When I made this argument in early 2009 I don’t recall finding many takers.  It seemed obvious that “the” debt problem was due to reckless practices of US banks and GSEs.  But then the crisis spread out of the sub-prime ghetto and engulfed other types of real estate debt.  Then municipal debt came under stress.  And now we have the euro-debt crisis.  Is it just a coincidence that all these separate debt crises flared up at about the same time?  Is it just coincidence that they all occurred just after the biggest drop in NGDP since the Great Depression?  Given that economic theory predicts that a sudden drop in NGDP growth will make it much harder to repay loans, my monomaniacal focus on NGDP doesn’t seem quite as crazy as in early 2009.

HT:  Tyler Cowen, David Levey, Christopher Mahoney


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16 Responses to “Monomaniacal . . . but in a good way”

  1. Gravatar of Benjamin Cole Benjamin Cole
    31. December 2011 at 09:36

    Excellent, excellent, excellent, and an excellent post to end a year of superb, informative and truly valuable blogging.

    Monomaniacal? Oh, let’ s see, only tens and tens of millions of people will be far better off in the USA in a growth economy, and how many people globally?

    And what have recessions and depressions historically done to humans and our societies? Economic growth and prosperity tend to correlate with better societies, although the reverse is also true.

    Call me monomaniacal too (sometimes I wish I never stumbled upon Scott Sumner)!

    Also important in this post: Sumner says nominal GDP, per se, does not matter, after all Japan’s nominal GDP is 40 times ours.

    Exactly right—becoming peevishly fixated on nominals is for the braying crowd of tub thumpers who want “zero inflation” or even deflation. (Set aside the task of even measuring inflation that accurately, in a world of rapidly evolving goods and services).

    We can use nominal GDP to the advantage of our countrymen), as advocated by Scott Sumner, and the Market Monetarism movement.

    Sally forth my fair friends into 2012. Stay on point,stay on point, stay on point—in the world of modern media, monomaniacalism pays off.

  2. Gravatar of Integral Integral
    31. December 2011 at 10:06

    Scott,

    I have a post up on the relevance of “nominal debt being paid out of nominal expenditure” on Lars’ blog: http://marketmonetarist.com/2011/12/27/the-integral-reviews-paper-1-koenig-2011/

    Straight from the horse’s mouth: the Fed’s internal research division.

  3. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    31. December 2011 at 11:03

    ‘Japan’s NGDP is nearly 40 times larger than America’s.’

    Presumably you mean the number of Yen v. dollars.

    But, you want monomaniacal? I’ll that and raise you:

    ‘Back around 2007 the US had lots of problems; income inequality, a rapidly declining home building sector, and according to some we were already well into The Great Stagnation. But one problem we didn’t have is high unemployment. Indeed unemployment was still only 4.9% in April 2008, by which time the great home building crash was already 70% over.’

    I have no problem with the above, but it still begs the question of what the meaning of ’cause’ is. This is a continuation of the argument (bickering?) I have been having with Stats Guy. By 2008 (he likes 2004) we are long into a story of ‘For want of a nail….’

    If Scott’s theory is correct that the severity and length of this recession is due to failed policy by the Fed, that doesn’t erase the fact that it was politicians messing with the home lending industry more than a decade earlier that put the Fed into the position they found themselves.

  4. Gravatar of Benjamin Cole Benjamin Cole
    31. December 2011 at 11:14

    Pat-

    No doubt free markets work best (save for some exceptions, like in the case of pollution, or perhaps health care).

    Every Western economy is a mix of imperfections and free markets. The USA is probably better than most.

    Regardless, Market Monetarism is the proper monetary policy.

    For me, a proper fiscal policy would bring federal outlays and expenditures down to 16 percent of GDP, and less regulations.

    The worst offenders, btw, are usually state and local governments, in which the words “free enterprise” are nearly banished. Really, have you considered our state-licensed lawyers, barbers, doctors, chiropractors (quacks), regulated liquor markets, city mass transit, local building codes and permits and zoning etc etc etc?

    There is not a city in America that allows informal jitneys or street vendors to prosper (common in Thailand, btw).

    All that said, Market Monetarism is still the best course. We will never have a free-enterprise oriented nation that you and I might want.

    If we want tight money to crank down on fiscal and regulatory excess, it will be very self destructive, and what impact would it have on the thick encyclopedia of local and state regs? None.

    Ergo, accept the fact we blow 8 percent of GDP on defense, homeland security and the VA, and start printing money until Ben Franklins come out of Ben Bernanke’s rear end in torrents, and he says he will have monetary diarrhea for years.

  5. Gravatar of John John
    31. December 2011 at 12:02

    Scott,

    I’ll concede that Hayek favored something resembling NGDP targeting and I’ll grant you that NGDP targeting may be the second best thing to an actual free market system in money and banking.

    Here’s the relevant quote that jumped out at me when rereading the Hayek compilation called A Tiger by the Tail: “Stable monetary conditions require that the stream of money expenditures is the fixed datum to which prices and wages have to adjust themselves, and not the other way around” (72).

    However, Hayek does not appear nearly as eager to use monetary policy as a means of fighting unemployment as you do. I suspect that if he were alive, he’d want the Fed to pick a number and stick by it rather than trying to catch up through level targeting. Here are a few quotes from the book where he advises against using monetary policy as a tool for reducing unemployment.

    “Full employment has come to mean the maximum of employment that can be brought about in the short run by monetary pressure… Once it was admitted that the momentary state of employment should form the main guide to monetary policy, it was inevitable that any degree of unemployment which might be removed by monetary pressure should be regarded as sufficient justification for applying such pressure” (60).

    “Where unemployment is not evenly spread, there is no certainty that additional expenditure will go where it will create additional employment. At least the amount of extra expenditure which would have to be incurred before the demand for the kind of services is raised which the unemployed offer may have to be of such a magnitude as to produce major inflationary effects before it substantially increases employment” (62).

    “Any attempt to create full employment by drawing labor into occupations where they will remain employed only so long as credit expansion [the real cause of boom bust cycles] continues creates the dilemma that either credit expansion must be continued indefinitely, or that, when it stops, unemployment will be greater than it would be if the temporary increase in employment had never taken place” (63).

    What I’ve concluded about NGDP targeting is that if you’re going to do it, the exact number isn’t as important as making sure that the monetary authorities consistently deliver on their pledges. If they pledge 5 and deliver 4, that would be pretty similar to pledging 2 and delivering one. Expectations and credibility would be extremely important to such a regime. Second, set it low enough so that the central bank bank quashes any credit expansion derived inflationary booms like the housing or dot com bubbles. Since the actual number they pick isn’t as important as delivering a stable stream of money expenditures, I’d favor a lower rather than higher target.

    That said, I still believe that having a monetary authority would make as much sense as having someone plan the United States’ production of cars or toilet paper. The free market with its price mechanisms works so much better than a system of planning (really an economic synonym for groping around in the dark) that I am in disbelief that the economics profession does not favor switching money production to the private sector. Hopefully, NGDP targeting would be a step towards a freer economy overall and eventually a free market in money and banking.

    I hope you had a great Christmas and a happy new year. I look forward to what you have to say in 2012.

  6. Gravatar of marcus nunes marcus nunes
    31. December 2011 at 12:22

    Scott David Beckworth has an illustrative post on the “cause” of the crisis:
    “Thus, the Fed’s failure to act and prevent the fall in nominal income meant, just as it did during the Great Depression, a systematic financial crisis was going to happen.”
    http://macromarketmusings.blogspot.com/2011/12/what-really-caused-crisis.html

  7. Gravatar of Pedro Pedro
    31. December 2011 at 13:16

    Why did the financial crisis cause an increase in the demand for money?

  8. Gravatar of anon/portly anon/portly
    31. December 2011 at 14:25

    “So far, the Federal Reserve has rejected his idea for NGDP target—under which the Fed would essentially target a combination of real output plus inflation rather than focus on curbing inflation alone—but the notion has attracted support from everyone from Paul Krugman to Tyler Cowen to Goldman Sachs. And much of that has to do with Sumner’s near-monomaniacal focus on the topic.”

    I kind of disagree with this. I think “Sumner’s near-monomiacal focus” has been less of a factor than (1) the quality of Sumner’s ideas (with much help from Beckworth, Rowe, Harless and the other less annoying bloggers); (2) the almost complete absence of good arguments to the contrary, which has led to (3), more prominent economists like Krugman semi-embracing NGDP targeting. I would say “semi-embrace” because of the “one the one hand, monetary stimulus can work, on the other hand, we urgently need more fiscal stimulus” thing, which I don’t really understand.

    Re my point (2) above, what I mean is that there’s a whole host of market monetarist points that I’ve never seen other econbloggers make any effort at refuting, which you’d think they would if they could. (Note: I don’t count Angry Bear as being a real econ blog). Such as the “has any central bank, ever, tried and failed to inflate?” point. If anyone has ever tried to refute that point, I missed it. Instead the whole “high inflation is imminent/impossible” meme seems to keep floating along on the Macro ideasphere like some really disgusting garbage clinging to the hull of a boat.

    I think what Ezra Klein says is fine, but his message is really much less of an upper than the following is a downer:

    http://www.blogger.com/comment.g?blogID=17232051&postID=842296458061425267

    The Andy Harless comments are terrific, but if you read Noah Smith’s post carefully, what comes across is a deeply ingrained incuriosity to Sumner’s ideas. Noah Smith is saying, in essence, “I don’t have to be very familiar with Sumner’s views to know that slagging them is a good idea.”

    Who would know better about these “Ketman” type issues than a smart grad student? I assume that Smith’s incuriousness is representative of the wider econ profession, and that market monetarism” has really gotten very little traction with the Macro world in general.

    I hope I’m wrong – I’m hoping that somewhere out there the question of the Fed’s ability to control the economy in a “liquidity trap” is being discussed by the “right” Macroeconomists, the ones who can actually influence that discussion, and not just the “wrong” ones who have blogs. Things like the Krugman/Williamson/Andolfatto pointless slag-off are not encouraging….

  9. Gravatar of Joe2 Joe2
    31. December 2011 at 15:23

    All the best for 12, Scott. Keep pumping this concept.

  10. Gravatar of StatsGuy StatsGuy
    31. December 2011 at 18:44

    … the marketing power of single mindedness. And, of course, being right. At least about NGDP targeting.

    :)

    @Patrick…

    “that doesn’t erase the fact that it was politicians messing with the home lending industry more than a decade earlier that put the Fed into the position they found themselves.”

    Perhaps, or maybe it was just oil prices spooking the Fed in 2008. Headline inflation in Summer 08 _was_ scary high. There are always lots of causes. The Fed’s failure was one, and certainly one of the most avoidable.

    I wonder how much the Fed’s intransigence is due to pride. I cannot believe, for instance, that Trichet had to get booted before Draghi could undo his mistake – that old man’s pride came before the suffering of millions.

  11. Gravatar of c8to c8to
    1. January 2012 at 00:41

    EK is right…there wasn’t even a wikipedia entry for nominal income target!

  12. Gravatar of Mattias Lundbäck Mattias Lundbäck
    1. January 2012 at 08:39

    Ezra might be correct about that few in the US are familiar with nominal GDP-targeting. But in Sweden there has been a lot of discussion among economists about this. Actually, the Swedish economist David Davidson proposed this goal for monetary policy long before Keynes and Hayek. He was debating this issue with the well known Swedish economist Knut Wicksell in the beginning of the 20th century. Here is an article in the Swedish economics magazine Ekonomisk Debatt:

    www2.ne.su.se/ed/pdf/27-6-go.pdf

    And I recently myself used the norm as a basis for explaining why the euro doesn´t work very well.

    http://debatt.svt.se/2011/10/26/dags-att-ifragasatta-hela-emu-projektet/

    Sorry about the Swedish. Maybe Google translate can do the job?

  13. Gravatar of ssumner ssumner
    1. January 2012 at 08:54

    Thanks Ben, Happy New Year.

    Integral, That’s a very interesting post.

    Patrick, Yes, I agree that the pro-housing policies were a big mistake.

    John, You said;

    “However, Hayek does not appear nearly as eager to use monetary policy as a means of fighting unemployment as you do.”

    That’s literally impossible, because I want the Fed to put zero weight on fighting unemployment.

    I’m afraid you are wrong about the free market question. Changes in the value of toilet paper don’t cause disequilibrium in all other markets. Changes in the value of money do. A free market doesn’t solve that externality problem.

    Marcus, He’s right.

    Pedro, I’m not sure it did. There was a tight money policy by the Fed that slowed the economy in early 2008. This caused interest rates to drop, and that increased the demand for money. High oil prices also reduced the demand for credit, which reduced interest rates. Ditto for the drop in home purchases.

    Anon/portly, Thanks for the link, I’ll do a post. I think it’s having more influence on the profession than you might assume. DeLong tweeted that David Romer recommended my National Affairs piece. Christina Romer linked to it. Those are both big names. After I email Cochrane my idea of futures targeting, he started advocating it. And of course Krugman and DeLong now advocated NGDP targeting.

    Thanks Joe2.

    Thanks Statsguy.

    C8to, That’s interesting, but I think market monetarism made Wikipedia a few months back.

  14. Gravatar of TheMoneyIllusion » Noah Smith thinks David Romer is batty TheMoneyIllusion » Noah Smith thinks David Romer is batty
    1. January 2012 at 09:51

    [...] far as the basic problem with Smith’s post, I think anon/portly nailed it in my comment section: The Andy Harless comments are terrific, but if you read Noah [...]

  15. Gravatar of David Davidson and the productivity norm « The Market Monetarist David Davidson and the productivity norm « The Market Monetarist
    1. January 2012 at 14:50

    [...] think tank Ratio has an interesting link to a paper by Gunnar Örn over at Scott Sumner’s blog. The paper is from 1999 and is in Swedish (so sorry to those of you who do not read and understand [...]

  16. Gravatar of ssumner ssumner
    2. January 2012 at 18:59

    Mattias, Thanks for the link–I see Lars did a post.

    George Selgin has a good history of the idea.

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