I thought my previous post was a big deal, but with a few exceptions other people didn’t seem to think so. So I’ll keep hammering the point home until others take notice, or tell me why I’m wrong.
This might be a good time to take stock of the amazing recent success of market monetarism. I can see at least four key ideas that have gone from fringe to mainstream since we started this crusade in late 2008:
1. Pointing out that the Fed could and should do much more to address the recession.
Here’s a quotation from Ryan Avent last year:
I SEE that Scott Sumner is taking a victory lap of sorts—not unearned—over the fact that views of monetary policy have come full circle since the years before the crisis. Once upon a time, the Fed was viewed as having near-absolute power over the path of the economy. Then crisis struck and many argued that the Fed had run out of ammunition and fiscal policy was required. Eventually people began arguing that the Fed could do more and should do more, thanks largely to the efforts of Mr Sumner himself. Now you have people like, well, yours truly saying that the Fed had a path to recovery in mind, such that a tightening of economic slack faster than it preferred would trigger a policy response. Once more, the economy is entirely in the Fed’s hands.
Of course lots of other market monetarists played a big role in this sea change in pundit opinion.
2. The growing popularity of NGDP targeting
The idea was endorsed by Goldman Sachs, Paul Krugman, and Christina Romer. All three mentioned market monetarists like Beckworth and me in their endorsements.
3. The growing recognition that people had reversed causality–to a significant extent the recession caused the debt crisis, or at least greatly worsened it in late 2008.
David Beckworth has an excellent post that shows the relationship between falling NGDP and the eurozone debt crisis:
David then quotes Paul Krugman on the euro crisis:
If the peripheral nations still had their own currencies, they could and would use devaluation to quickly restore competitiveness. But they don’t, which means that they are in for a long period of mass unemployment and slow, grinding deflation. Their debt crises are mainly a byproduct of this sad prospect, because depressed economies lead to budget deficits and deflation magnifies the burden of debt.
Translation: “Depressed economies” means low RGDP. Low RGDP plus deflation means low NGDP. I.e., low NGDP worsens debt problems. It’s increasing clear that the second and more severe phase of the US financial crisis in September 2008 was triggered by the dramatic fall in NGDP between June and December 2008, the sharpest since the 1930s. Let me know if Krugman applies his reasoning to the US situation; that would be a big win. (Of course a cynic would claim he’s more interested in looking for excuses when the crisis seems caused by reckless government borrowing, than when it seems caused by reckless private sector borrowing. But I’m not a cynic.)
4. The stance of monetary policy is indicated by NGDP growth, and thus policy since mid-2008 has been ultra-contractionary.
This is clearly the view that was most at odds with conventional wisdom. Almost everyone simply assumed money had been “extraordinarily accommodative,” even though exact opposite was true, using the metrics for easy and tight money in mainstream textbooks like Mishkin. But now we have the most conventional of conventional wisdom endorsing market monetarism. Here’s Ben Bernanke himself:
Ultimately, it appears, one can check to see if an economy has a stable monetary background only by looking at macroeconomic indicators such as nominal GDP growth and inflation.
Inflation since July 2008 has been the lowest since the mid-1950s, and way below the Fed’s target. NGDP growth has been the lowest since Herbert Hoover was president. If you average those two metrics, it’s the lowest since the 1930s. Since Bernanke believes these are the proper metrics for judging the stance of monetary policy, he obviously believes the Fed has run an ultra-contractionary monetary policy since July 2008, right before the severe phase of the debt crisis.
I’d say that market monetarism is on a roll. It’s now conventional wisdom that the Fed could have and should have done more. Not conventional wisdom among average people, but among the best and brightest in the blogosphere. And even Ben Bernanke believes that Fed policy has been ultra-contractionary if measured using appropriate metrics. There is growing awareness that this tight money reduced NGDP growth sharply, dramatically worsening the debt crisis in both America and Europe. And elite opinion-makers on both the left and the right are increasingly likely to see NGDP targeting as the answer.
Those who have only recently started following blogs might wonder what’s the big deal. But go back to late 2008 and see what people believed before market monetarism got going. We’ve significantly transformed elite pundit opinion on four major issues. That’s worth celebrating.
PS. This list is by no means exhaustive. Nick Rowe influenced how people think about Fed signaling. David Glasner showed that the excessively tight money changed the stock market reaction to inflation–essentially showing that stock investors are market monetarists too. Marcus Nunes was the first to show how Bernanke was rejecting the very advice he’d given the BOJ in similar circumstances—an idea that recently got widespread coverage due to a Lawrence Ball paper. And I could go on and on.