More evidence that Bernanke regards NGDP as the correct monetary policy indicator

Before Bernanke became chair of the Fed, I regarded him as someone with shared many of my views on money/macro.  Thus I haven’t been surprised that people were able to dig up old Bernanke articles that sounded almost exactly like TheMoneyIllusion.  Recently I did a post pointing out that Bernanke shares my skepticism of traditional monetary indicators.  Here I quoted Bernanke from 2003:

The imperfect reliability of money growth as an indicator of monetary policy is unfortunate, because we don’t really have anything satisfactory to replace it. As emphasized by Friedman  . . . nominal interest rates are not good indicators of the stance of policy . . .  The real short-term interest rate . . . is also imperfect . . .  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.

In subsequent posts I emphasized the NGDP part more than the inflation part.  However, even if you average the two, policy has been tighter since mid-2008 than at any time since the 1930s.  And it seemed to me that the inflation remark was an off-handed comment aimed at placating those who were unfamiliar with NGDP.  David Eagle recently left a comment at that post, where he argued that I was wrong about NGDP; Bernanke favored inflation as a policy indicator and target.  I certainly agree that Bernanke doesn’t favor an NGDP target, but of course he’s also opposed to a strict inflation target.  And flexible inflation targets are arguably more like NGDP than inflation.

But David’s comment got me wondering whether there was other evidence that Bernanke viewed NGDP as the best indicator of the stance of monetary policy.  There is.  It’s not incontrovertible, but it’s pretty strong.  The following quotations are from a 1999 paper by Bernanke sent to me a couple years ago by Marcus Nunes, a gift that keeps on giving:

I do not deny that important structural problems, in the financial system and elsewhere, are helping to constrain Japanese growth. But I also believe that there is compelling evidence that the Japanese economy is also suffering today from an aggregate demand deficiency. If monetary policy could deliver increased nominal spending, some of the difficult structural problems that Japan faces would no longer seem so difficult.  (italics added.)

I think the key word is “deliver.”  He’s not saying the BOJ should target NGDP, rather than growing NGDP is a means to an end.  It’s an indicator that the BOJ would have successfully boosted AD, which is a necessary condition for achieving their policy goals.  The same article also says this:

Perhaps more salient, it must be admitted that there have been many periods (for example, under the classical gold standard or the price-level-targeting regime of interwar Sweden) in which zero inflation or slight deflation coexisted with reasonable prosperity. I will say more below about why, in the context of contemporary Japan, the behavior of the price level has probably had an important adverse effect on real activity. For now I only note that countries which currently target inflation, either explicitly (such as the United Kingdom or Sweden) or implicitly (the United States) have tended to set their goals for inflation in the 2-3% range, with the floor of the range as important a constraint as the ceiling (see Bernanke, Laubach, Mishkin, and Posen, 1999, for a discussion.) Alternative indicators of the growth of nominal aggregate demand are given by the growth rates of nominal GDP (Table 1, column 4) and of nominal monthly earnings (Table 1, column 5). Again the picture is consistent with an economy in which nominal aggregate demand is growing too slowly for the patient’s health. It is remarkable, for example, that nominal GDP grew by less than 1% per annum in 1993, 1994, and 1995, and actually declined by more than two percentage points in 1998.  (emphasis added.)

Here’s how I read that paragraph.  The first half is all about inflation.  It does admit that inflation is not always a reliable indicator.  That when AS is growing strongly it is possible for prosperity to co-exist with mild deflation.  Then in the second half of the paragraph he is much more forceful; using terms like “nominal aggregate demand”, “nominal monthly earnings”, “nominal GDP”, and using them almost synonymously—which is not surprising because they are basically equal in the simple circular flow set-up (although the terms can be defined slightly differently.)

I read Bernanke as saying inflation can be a misleading indicator (probably because it reflects both demand and supply shocks), but nominal expenditures is reliable, and by that indicator Japan has been too tight.  Maybe that’s wishful thinking, but unless I get forceful push back from commenters, I’m inclined to take as a given that Bernanke views falling NGDP as tight money.  The last comment in the quotation (about 1998) now seems highly ironic, given that the exact same thing happened in America in 2009.  And Bernanke said the decline in Japanese NGDP occurred because of errors of omission.  And elsewhere he said that financial problems in the banking industry were no excuse for the BOJ allowing a big decline in demand.

The 1999 paper by Bernanke, which I discuss in depth here and here, is the single best published explanation of the crash of 2008-09.  Irony just doesn’t get any more ironic than that.


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55 Responses to “More evidence that Bernanke regards NGDP as the correct monetary policy indicator”

  1. Gravatar of Major_Freedom Major_Freedom
    15. March 2012 at 11:32

    What I have not yet seen market monetarists answer is this:

    Why aren’t cash balances an integral part of monetary policy? People do take their cash balances into account when they act. It is just as important as spending money. A commodity can only be money if it can, in addition to its other uses, serve as a storage of purchasing power.

    Targeting aggregate transactions only, even the very encompassing aggregate like NGDP, is just as terrible a policy as targeting aggregate cash balances only.

    Money is good for both spending and holding. If you doubt this, just consider how much more cash people were searching for during 2008-2009.

    Counteracting voluntary market desires to increase cash balances at the expense of nominal transactions (by central banks inflating the money supply), or desires to increase nominal transactions at the expense of cash balances (by central banks deflating the money supply), attacks economic calculation and deprives people of the ability to rationally plan their economic lives.

    It won’t matter to people that NGDP keeps growing at a 5% rate, if cash balances have to go haywire alongside it, such as the totally unsustainable exponential rise in M3 in Australia. If they keep up what they’re doing, then they’re going to have to abandon NGDP, or abandon the Australian dollar. They won’t be able to have both.

    You see, when you don’t underdstand money fully, and like the Keynesians you relegate cash holdings to the netherworld of evil, or insignificance, or “useless metric” rhetoric, then it WILL come back and bite you in the keester.

    Inflation is not, never had been, and never will be, a permanent, sustainable policy. Not as long as humans learn and act. Maybe for robots it will work, but humans aren’t robots.

  2. Gravatar of Major_Freedom Major_Freedom
    15. March 2012 at 11:53

    “The imperfect reliability of money growth as an indicator of monetary policy is unfortunate, because we don’t really have anything satisfactory to replace it. As emphasized by Friedman . . . nominal interest rates are not good indicators of the stance of policy . . . The real short-term interest rate . . . is also imperfect . . . 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.”

    Did Bernanke just say that the aggregate money stock is not a macroeconomic indicator? It’s hard to tell.

    Sumner, here’s a scenario that I would like for you to consider:

    Suppose tomorrow everyone tried to add 99% of their nominal incomes to their cash holdings, and they are of such a constitution that no matter how much additional nominal incomes are offered, they will refuse to accept any more, and they will still keep spending the same amount as before, say a collective $10o billion for argument’s sake.

    Suppose the Fed in response to this prints so much money and buys whatever securities they buy, so that for the next few days, NGDP goes back up to its original level growth. But alas, people are still of a constitution that they will not spend more in nominal terms, and only the primary dealers accept more money, but they do not spend more money. The primary dealers who receive the huge windfall of money, will hoard 100% of it, and continue to spend the same amount they used to, as well as everyone else, for a total of $100 billion.

    Suppose that again the Fed prints more money, and again buys securities, and again, the primary dealers hoard the entirety of the cash windfall, and they still spend the same amount of money as before, and so does everyone else.

    Imagine that the economy keeps growing in real terms, because even though the primary dealers are seeing their cash balances rise by billions, if not trillions, and everyone else has already stashed away more dollars and are now spending at a lower level than before, the spending has levelled off, and the economy as a whole is behaving as if there is no inflation at all. There is still saving, there is still investing, and real growth is still taking place. Prices are much lower than they used to be. There was initially very high unemployment, but labor prices have come down enough to clear the labor market. Real standards of living are rising. Production is increasing by virtue of capital accumulation. People are behaving as if the new money being created by the Fed means nothing.

    Here’s the question:

    Would you consider this economy to be a “failure”, or would you consider this economy to be a “success”?

    This is of course a thought experiment, so try to put criticisms of realism aside for a moment.

  3. Gravatar of Eric G Eric G
    15. March 2012 at 12:00

    If the Fed started to target NGDP, then there was a fiscal stimulus that caused growth and jobs to go up, then how would we know if it NGDP targeting really worked?

    Separately, if the Fed refused to target NGDP but instead just kept the 2% inflation target no matter what, then there was a fiscal stimulus but jobs and growth stayed the same or along the trend we are seeing, then how would we know if stimulus really worked or if it was just knee-capped by the Fed?

    I ask because there was the huge tax cut of 1981 but also a tightening of monetary policy at the same time, so the result was job losses and negative GDP, but then the monetary policy was eased and there was a large tax increase in 1983, but jobs and GDP increased. Looking at this example, one might say that tax cuts caused job losses and tax increases caused job gains. Most economists agree (I think) that the Fed policy was the biggest factor, but how can they know?

  4. Gravatar of John Bennett John Bennett
    15. March 2012 at 12:59

    With respect. Economists need to convince the public that low inflation and unemployment are not the only measures of good economic policy. The public has never heard of NGDP.

    No matter how much we may admire Bernanke, he is up against an FOMC that is not with him, much less the bulk of the economics profession.

    Keynes and his followers changed views in the 30′s. Thie generation of revolutionary economists can do it again. This is not a conservative or a liberal issue–it is over what works.

  5. Gravatar of Morgan Warstler Morgan Warstler
    15. March 2012 at 13:06

    I think that you need to start selling NGDPLT this way:

    If we have a 4-4.5% level target, Main Street, the Fed, and the govt. itself will WANT the growth to come from:

    1. RGDP in the private market.
    2. Inflation only if RDGP isn’t 4.5%.

    This means:

    1. When the real private sector economy is growing near 4.5% there will be immense pressure to adopt deflationary US fiscal policies – cutting public employee pay will quickly get us under the cap.

    2. When we are experiencing inflationary commodity shocks there will be immense pressure to drill baby drill and lay pipe, baby, lay pipe.

    3. Then when times are bad, and we face little or no inflation on the horizon, then and only then do we print some money.

    Note 2 or 3 of these are pretty damn good to the right.

    Put the meat in the window.

  6. Gravatar of W. Peden W. Peden
    15. March 2012 at 13:14

    Eric G,

    I don’t think there’s a model of fiscal stimulus where tax cuts in 1981 first cause a near-halving of NGDP growth in 1982 and a deep contraction in RGDP, and only have stimulative effects in 1983-1984. In fact, in any realistic expectations-including model, any demand-side impact of tax cuts would have begun in the autumn in 1980 when it became apparent that Reagan was going to win.

    The truth is that it’s hard to ascribe any big episodes in the history US aggregate demand since about 1971 to fiscal policy, although I think that fiscal policy was a significant factor in the recovery (such as it was) in 2009. The same story is true in the UK as well: the last time fiscal policy marched plainly in step with aggregate demand was probably about 1972-1973 and even then monetary policy was the main factor in the movement of NGDP.

    Can fiscal policy dominate the determination of NGDP? In practice and in fairly open economies, the answer seems to be “No unless the fiscal stimulus/tightening is politically monstrously controversial.”

  7. Gravatar of marcus nunes marcus nunes
    15. March 2012 at 15:02

    Scott
    When I tell people I think Bernanke was a BIG failure they get all “worked up” and say things like “Who do you think you are to criticize the Chairman”?
    I answer that I´m saying he´s a failure compared to himself, no one else!

  8. Gravatar of ssumner ssumner
    15. March 2012 at 15:54

    Major, I can’t imagine people not wanting higher nominal incomes.

    Eric, The Fed moves last. It takes all other factors into account when setting policy. It has the responsibility for determining growth in NGDP, regardless of what fiscal policy does.

    John, You said;

    “With respect. Economists need to convince the public that low inflation and unemployment are not the only measures of good economic policy. The public has never heard of NGDP.”

    The public also doesn’t have even a clue as to what “inflation targeting” is. The public was shocked to hear that Bernanke was trying to raise inflation in late 2010. The public would oppose inflation targeting if it was explained to them. I think we can safely ignore the public when it comes to monetary policy. We need to convince economists that NGDP targeting is a good idea—and we are making lots of progress, as you may have noticed.

    Morgan, Isn’t “meat in the window” a rather old-fashioned phrase? You seem to think I’m old fashioned, but lots of people are becoming vegetarian.

    I did read today that more people in India have cell phones than toilets, however, so I guess you were right about that.

    W. Peden, I agree.

    Marcus, That’s the right way to look at it.

  9. Gravatar of Major_Freedom Major_Freedom
    15. March 2012 at 16:38

    ssumner:

    Major, I can’t imagine people not wanting higher nominal incomes.

    Indulge me.

  10. Gravatar of Steve Steve
    15. March 2012 at 17:54

    Scott, you wrote “Irony just doesn’t get any more ironic than that.”

    I view this as the most ironic Bernanke writing ever:

    http://online.wsj.com/article/SB947027252754116777.html
    Wednesday, January 5, 2000

    What Happens When Greenspan Is Gone?
    By Ben S. Bernanke, Frederic S. Mishkin and Adam S. Posen

    “The Fed needs an approach that consolidates the gains of the Greenspan years and ensures that those successful policies will continue—even if future Fed chairmen are less skillful or less committed to price stability than Mr. Greenspan has been”

  11. Gravatar of dtoh dtoh
    15. March 2012 at 18:41

    @MF
    Here’s another thought experiment. Imagine you had an economy with no money and no barter. Everything is done on credit. The economy has a central server (whom we shall call Ben) with a fixed algorithm that dictates to the buyer and seller on what terms the seller must extend credit to the buyer. Credit is based on a unit of account that everyone accepts, but no one remembers what it actually is (we’ll call it the dollar). The server also performs a clearinghouse function offsetting credit claims between all inhabitants.

    Except for Ben (their credit server) this is a very primitive society so every time there is an eclipse, the inhabitants become more risk adverse about borrowing money until the next eclipse, after which the inhabitants return to their normal rationale behavior. Accordingly, based on the cycle of eclipses, economic production goes up and down.

    One day, after a particularly intense eclipse, one of the inhabitants (whom we shall call Scott) discovers by standing in front of the server, shouting loudly three times, doing a small jig, standing on his head, sticking out his tongue, and finally tapping Ben’s CPU not so gently with a stone axe that he can cause a slight change in Ben’s credit allocation algorithm which will exactly offset the aversion to borrowing induced by the eclipse.

    Thereafter follows a long debate amongst the village council around the ceremonial fire as to whether to apply the young whippersnapper Scott’s new discovery. The main objection is a fear that the Ben will go out of control and provide unlimited credit. The village sorcerer (I think his name is Paul) occasionally provides useful input but suffers from a bipolar disorder which is triggered whenever he sees a prosperous hardworking farmer. Everyone in the council claims they know what the old kings John and Milton would have done. Once in while, the discussion stops and the council look intensely at Ben because it’s making human-like but mostly unintelligible noises (actually it’s just noise from a defective disk drive but the council members don’t know that.) One of the council members (Goldie someone) argues that he should be the chief money lender and take over control of Ben. And occasionally the council members all get off on a tangential discussion of whether instead of drinking officially approved fermented coconut juice at council meetings they should instead smoke coconut leaves.

    Finally, the fermented coconut juice begins to take effect. The council members begin to pass out, and the fire begins to die down until…Scott rolls some more (b)logs onto the fire.

  12. Gravatar of Major_Freedom Major_Freedom
    15. March 2012 at 18:41

    ssumner:

    I think we can safely ignore the public when it comes to monetary policy.

    And that’s a major reason why NGDP wouldn’t be any better. If the public are ignorant of inflation, then they’ll be ignorant of NGDP.

    We need to convince economists that NGDP targeting is a good idea—and we are making lots of progress, as you may have noticed.

    In other words, you’re saying you need to convince the state, via the state’s vanguard of statist intellectuals.

    It’s not about the people. It’s about power and control.

  13. Gravatar of Major_Freedom Major_Freedom
    15. March 2012 at 18:45

    dtoh:

    All that effort in the story, and no punchline or question. Just a rather pathetic ode to Sumner. How anti-climactic.

  14. Gravatar of Bonnie Bonnie
    15. March 2012 at 18:52

    Thanks for pointing out this Bernanke paper. It will help me with a policy project I am working on. But that is really the only use I have for Bernanke, as he seems to be not much more than a limp noodle, or at the very least, not very persuasive in convincing his colleagues to do the right thing. People can talk about the right things to do all day, but if they can’t get it done when in a position to do it, they might as well have never said anything at all. Sometimes, I wish I never knew who Bernanke is.

    By the way, while I was looking for that Friedman video I mentioned in the comments section several posts ago (I haven’t found it again though, the population of Friedman videos on YouTube has exploded since I last saw it and so there are hundreds to sift though), I found an interesting one where he talks about the accountability the Australians imposed on their central bank in the 90s. He said they established an inflation target of no more than 2% or the chairman would be removed. He didn’t mention if there was a lower limit to the target that would trigger the same kind of accountability response, however.

    That might be something to consider the next time congress is debating what the mandates for the Fed should be, because I just don’t think that the mandates mean anything at all, and in that sense are completely worthless from an expectations management point of view. They also do not help when monetary policy drifts off course for one reason or another and remains out in the weeds indefinitely. My version of accountability would be that if either the upper or lower limits were transgressed without mitigation efforts, an automatic trigger would remove all members of the FOMC, including the Fed Chairman, on an annual basis until the aggregates reflect execution of the mandates. The Fed could implement those limits however it chooses, but one thing would be crystal clear – no more dabbling around the margins of extremes and leaving it that way without a huge ax falling on the members of the entire body. They would have no choice but to do their job or lose it, and congress wouldn’t have to do anything to get rid of them.

  15. Gravatar of dtoh dtoh
    15. March 2012 at 19:19

    MF
    As Yoda would say, obvious are the question? and answer!

  16. Gravatar of Becky Hargrove Becky Hargrove
    15. March 2012 at 19:19

    “I think we can safely ignore the public when it comes to monetary policy.”

    Even if every economist were convinced – do you mean for the short term or the long haul? Remember that Bernanke, as he promoted more proactive policy, received some heartfelt questions from the public that basically amounted to “Why do we need these policies?” IMHO I think the long term goals can be secured only by formulating stories that the public can relate to. So for what it’s worth, here is what I presently see as the role of the nominal economy and the importance it holds.

    First, there are five basic economic activities. Maintenance, building, creating, healing, and understanding. The healing discipline is literal and figurative, not only making the body whole but also the reconciliation of ideas. The real economy stems primarily from the building discipline, but it is also possible through new products that are built and sold from the other disciplines. What this means is that practically everything not being built (or grown or extracted) is also not original monetary wealth, and so the world of nominal is built on transfers.

    The service industries are almost completely nominal, except for finance which is almost completely composed of new intermediary product. We compensate in three ways for the dependence of services on the real economy: velocity from original wealth, governmental transfers, and financial intermediaries. The latter has done a lot of the heavy lifting in recent decades as markets have tightened, and accounts for the fact that Bernanke needs to maintain housing value in the present. Your classification of housing as investment is important not in that we live in houses, but that mortgage backed securities became the most important instrument for buying services needed in the future.

    I need to sum this up. The nominal economy matters more to the individual than economists may realize, because it is the very definition of what is possible to maintain, and what is not, in money based terms.

  17. Gravatar of Don Geddis Don Geddis
    15. March 2012 at 20:20

    @Major_Freedom: I hesitate to reply to you (“don’t feed the trolls”), but perhaps something tightly focused?…

    You write: “In other words, you’re saying you need to convince the state, via the state’s vanguard of statist intellectuals. It’s not about the people. It’s about power and control.”

    You’re confusing “why” with “how”.

    WHY do NGDP level targeting? In order to remove the unnecessary pain of the last 4 years of 8-10% unemployment, when it could have been 4-5%. That’s a huge amount of human suffering, and of forgone national wealth.

    HOW do we change the Fed to NGDP level targeting? The Fed is a monopoly, and its actions appear to follow the consensus of mainstream academic economic opinion. The opinions of the lay public don’t really matter much.

    So yes, it is “about the people”. But the route to success for the people, is NOT to convince the people themselves.

  18. Gravatar of Rien Huizer Rien Huizer
    16. March 2012 at 01:18

    Scott,

    At least Dr B says that he considers NDGP developing along a stable (upward sloping) path a desirable thing and NDGP a better indicator of good or bad monetary policy. . Does that mean that he thinks NDGP (or NDGP level) should be the sole target of monetary policy? If I compare this to the way I look at my health, there are several things that I consider but will; not be able to influence.

    Does Dr B (the academic, not the technocrat) say how he would go about sheparding NDGP along an appropriate path? My doctor does not know how I should live to keep my hair from turning grey, but my barber would probably have no trouble in finding a cure..

  19. Gravatar of Rien Huizer Rien Huizer
    16. March 2012 at 01:49

    Major

    You said

    “It won’t matter to people that NGDP keeps growing at a 5% rate, if cash balances have to go haywire alongside it, such as the totally unsustainable exponential rise in M3 in Australia. If they keep up what they’re doing, then they’re going to have to abandon NGDP, or abandon the Australian dollar. They won’t be able to have both.”

    Apart from the merit of your second sentence (logic escapes me), Australia is having M3 growth at a much lower rate than the average of the past five years. Given that the major growth item in M3 is bank term deposits and Australian banks are suffering from the same international funding challenges as banks everywhere which causes them to chase depositors (especially domestic ones) where in the more distant past they relied more on securitisations offshore (since the GFC the bulk of new mortgage production sits on bank balance sheets).

    The growth in bank deposits goes at the expense of other financial investments (not captured in any M), forms a rather volatile statistic, but the moving average has been coming down in recent years. This despite renewed international reluctance among international investors to invest in bank deposits. The main reason op that is that the asset side of the banks is slowing down too, and at a rate that makes the loss of foreign funding much more bearable.

    What is happening though in Australia is that RBA interest policy is becoming difficult, because policy rates are far below market funding costs and the traditional signalling value of RBA policy rates is being lost. An RBA interest rate cut used to be immediately translated into lower rates on variable rate mortgages (the dominant type) and that is no longer the case. If the RBA was following a mechanical Taylor rule, rates would have been coming down a lot recently (probably the same output gap (or maybe slightly greater than a year before, but much lower core inflation: take your pick), but the funding situation is keeping rates high.

    What should Oz do to slow down M3 growth and why?

  20. Gravatar of UnlearningEcon UnlearningEcon
    16. March 2012 at 02:45

    Scott/any market monetarist here, I have a simple couple of questions.

    I know you regard endogenous money as cranky or w/e, but let me get this straight. The money multplier model predicted that:

    I mean, MM predicted that:

    (a) We could control the money supply exogenously

    (b) M1+ expansion would succeed M0 expansion

    But neither were true. The response is:

    (a) The multiplier/V are volatile

    (b) ???

    Please tell me if (a) is correct and fill in (b) for me. Thanks!

  21. Gravatar of UnlearningEcon UnlearningEcon
    16. March 2012 at 02:47

    Oh and mainstream economics also predicts that private debt should empirically have little impact on the macroeconomy because assets = liabilities. So how would you respond to this?

    http://blogs.lse.ac.uk/politicsandpolicy/2012/03/14/ignoring-the-role-of-private-debt-in-an-economy-is-like-driving-without-accounting-for-your-blind-spot/

  22. Gravatar of Major_Freedom Major_Freedom
    16. March 2012 at 04:40

    Don Geddis:

    @Major_Freedom: I hesitate to reply to you (“don’t feed the trolls”), but perhaps something tightly focused?

    That’s nice.

    You write: “In other words, you’re saying you need to convince the state, via the state’s vanguard of statist intellectuals. It’s not about the people. It’s about power and control.”

    You’re confusing “why” with “how”.

    Nope. I am identifying the why AND the how. The why is that the people are allegedly stupid. The how is to convince the state’s vanguard intellectuals.

    WHY do NGDP level targeting? In order to remove the unnecessary pain of the last 4 years of 8-10% unemployment, when it could have been 4-5%.

    Oh, well if your standard is to minimize pain, then central banks should be abolished. That would remove the unnecessary pain from the boom bust cycle.

    HOW do we change the Fed to NGDP level targeting? The Fed is a monopoly, and its actions appear to follow the consensus of mainstream academic economic opinion. The opinions of the lay public don’t really matter much.

    You mean they appear to follow the consensus of the statist economists. You call them mainstream.

    So yes, it is “about the people”. But the route to success for the people, is NOT to convince the people themselves.

    No, it’s not about the people. You just said it’s not about them at all, but the state and their intellectuals.

  23. Gravatar of Major_Freedom Major_Freedom
    16. March 2012 at 04:42

    Rien:

    What should Oz do to slow down M3 growth and why?

    The central bank should commit to a gold standard and only create new paper money when they come into ownership of more gold.

  24. Gravatar of Morgan Warstler Morgan Warstler
    16. March 2012 at 05:19

    The vegetarian vote is worthless.

    Some people will kill to keep eating meat. That’s where rights come from. Raw Milk hippies might very well take this lesson.

    —-

    The point is your stuff is most swallow-able said a certain way, from a certain ideological base camp.

    If Milton Friedman were pitching this very same idea, many conservatives would be paying attention.

  25. Gravatar of Becky Hargrove Becky Hargrove
    16. March 2012 at 05:34

    Don Geddis,
    I spent two hours last night composing an argument about convincing the people. Why are you so all fired sure this is not important? I am hoping it is something Scott said without meaning to because he is trying to get some work done on his manuscript. I think if Bernanke had a bit more time he would be spending more of it trying to convince the people himself.

  26. Gravatar of Becky Hargrove Becky Hargrove
    16. March 2012 at 05:44

    All equations and theories aside…since when did it cease to be important to win battles with words?!?!

  27. Gravatar of Becky Hargrove Becky Hargrove
    16. March 2012 at 05:59

    Scott, I’m sorry about being upset but this is important. Please have an answer in your book for the question the woman asked Bernanke in El Paso. Even Basic Books wants you to pitch your argument to the people.

  28. Gravatar of dwb dwb
    16. March 2012 at 06:36

    no mercy:

    http://www.slate.com/blogs/moneybox/2012/03/16/no_mercy_for_ben_bernanke.html

  29. Gravatar of Becky Hargrove Becky Hargrove
    16. March 2012 at 06:55

    Re: no mercy
    Note to Yglesias – You’re not helping! Every economist, every pundit needs to help Bernanke in the fight of his life because if he goes down there is no guarantee the Fed will stand. How does anyone expect to win the battle of NGDP targeting if the bigger battle of the Fed’s existence is lost. How is Bernanke supposed to do it all alone? Have we suddenly come to expect people to be able to exert power when too few are actually in their corner so that it can happen?

  30. Gravatar of dwb dwb
    16. March 2012 at 07:26

    what would be interesting is where the two nominees stand on monetary policy (the senate media circus, i mean confirmation hearings are next week, right?). i have not seen or found much at all.

  31. Gravatar of bill woolsey bill woolsey
    16. March 2012 at 07:47

    Becky:

    I think the Fed should go.

    I am not interested in helping Bernanke save the Fed.

    The Fed has screwed up one to many times.

    Fire Bernanke, every member of the Board of Governors, the President of every Federal Reserve bank, and every single employee.

    Now, I would not suggest doing this first, and then coming up with a replacement.

    Rather, I would come up with a replacement, and then close down the current system.

  32. Gravatar of ssumner ssumner
    16. March 2012 at 08:35

    Steve, Yes, that’s pretty ironic.

    MF, I take it that when the US government had the moon program you wouldn’t want the orbit planned by elitist scientists, but rather an average of popular opinion.

    Bonnie, That’s for that story, but I thought it was New Zealand.

    Becky, Yes, I agree that it’s easier for the public to understand the need for national income to grow at a steady rate, than the need for the CPI to go up at a steady rate.

    Rien, Yes, he has lots of writing on that subject.

    UnlearningEcon, I’ve been teaching econ for 30 years, out of the most popular money textbook. And it doesn’t assume either the multiplier or V is constant, so I have no idea what you are talking about. Indeed it shows that the multiplier changed dramatically in the Great Depression.

    Perhaps you should learn economics, before you decide to unlearn it.

    Respond to what?

    dwb, That really should be a circus.

    Becky, In some ways Matt is too hard on Bernanke. The real problem is the consensus view of economists is probably more hawkish than Bernanke.

  33. Gravatar of Don Geddis Don Geddis
    16. March 2012 at 09:02

    Becky, I didn’t mean to cause you grief. Of course it’s a noble goal to educate the public too.

    But that’s both a more difficult problem, and also not necessary. Think of other subjects where the experts ALREADY have come to complete consensus, but the public doesn’t yet agree. For example, does free trade cause mutual gains, or jobs to get sucked from the US to exploited Mexicans and Chinese? Does evolution explain current and past biology? How’s the War on Drugs going? Is the TSA effective at preventing terrorism?

    Political theater is a lot about ideals and impressions and feeling and signaling, not so much about “truth”.

    Do you think professional biologists care much that a large fraction of the US public thinks evolution is “wrong”? How does that influence on them compare to the detailed technical papers published in biology journals?

    At least give Sumner credit for this much: he’s writing a prolific blog, accessible to the lay public, on NGDP targeting. He could just be only publishing in technical journals. I’m a perfect example of a non-economist who came to understand MM (and macroeconomics in general), due to Sumner’s efforts here.

    I think there isn’t much more you can do, besides something like Sumner’s blog, when the professional economists don’t yet have consensus. You need to convince them first. Otherwise, the public is going to receive mixed messages from prominent credentialed academics, and have no idea what to believe. (And, as shown by those other subjects, even when the professionals agree, the public often STILL disagrees.)

  34. Gravatar of Becky Hargrove Becky Hargrove
    16. March 2012 at 10:37

    bill woolsey,
    I understand your frustration, and certainly am not happy at what has come to pass in our monetary system. It is so tempting just to knock the whole thing down and start over. Let’s at least figure out why it happened in the first place, so that people 60 or 70 years from now do not have to go through the same thing all over again. Without a doubt, propping up the system further in the present (as it currently exists) is buying time. But if we use that time wisely to place knowledge wealth into a time based equilibrium, perhaps we will not have to worry about our doctors driving taxi cabs when every mortgage backed security deflates. I do not like the games that were played with housing. Those games had a direct impact on my life that I deal with every day. Even so, I wish a better fate for all who do not understand why their best efforts are not enough to survive. Instead of blaming the Fed, at least we can allow that they were only trying to foot the bill (take responsibility) for our own excesses and misunderstandings.

  35. Gravatar of Becky Hargrove Becky Hargrove
    16. March 2012 at 11:06

    Don Geddis,
    I really appreciate your thoughtful response. Some days I get ahead of myself and perhaps see more danger (in the world) than actually exists! As a non-economist, Scott’s blog has helped me in the same ways it has helped you, and the issues you spoke of are equally important to me.

  36. Gravatar of Bill woolsey Bill woolsey
    16. March 2012 at 11:29

    I have a pretty good grasp about what went wrong.

    What are we supposedly protecting the Fed from?

    Why do we want to help Bernanke?

    The Fed was responsible for the Great Depression, the Great Inflation, and the Great Recession.

    Three strikes and you are out.

    The basic legal framework is based upon a gold standard and a unit banking system. Its effort to deplace the private clearinghouses resulted in a system of 12 regional banks nominally owned by the banks.

    The gold standard is gone and whatever we have now, it is hardly a unit banking system.

    BOA South Carolina is part of the Richmond district but BOA California is part of the San Francisco district? We need to make sure that Southeastern money stays in the Southeast and Western money stays in the west? What?

    Let’s have the bankers in each region elect boards that choose a group that rotates in and out of determining “monetary policy?” What?

    When it was set up, “monetary policy” was the dollar value of gold set by Congress.

    It is time to start over. Most importantly, the mission needs to change.

    The U.S. needs an independnent monetary authority. It needs to have a constitutional basis and not simply be legislation.

    In my view, the needed mission is that the quantity of money adjust to meet the demand to hold money. And further, that the best means to that end is for money spending on output te gagued to match the trend growth rate in productivity.

  37. Gravatar of Major_Freedom Major_Freedom
    16. March 2012 at 11:47

    ssumner:

    MF, I take it that when the US government had the moon program you wouldn’t want the orbit planned by elitist scientists, but rather an average of popular opinion.

    If the moon program were really a program of coercively planning people’s economic lives? Then YES, of course I would want the individual, the elite scientist and the average Joe, to have full input in what affects their own economic affairs.

    Maybe you’ve forgotten all this in your ivory tower mentality, but I haven’t.

  38. Gravatar of Major_Freedom Major_Freedom
    16. March 2012 at 11:50

    And monetary policy is on opposite poles to the space program. Monetary policy cannot inherently work. The space program, inherently can, because the former is a form of central economic planning. The latter is not.

    But it’s hilarious that you use the space program as an analogy to monetary policy. It truly shows the lofty heights you wish to put legalized counterfeiting.

  39. Gravatar of Becky Hargrove Becky Hargrove
    16. March 2012 at 12:01

    Bill you just nailed it on the last sentence: however we are still trying to determine what the heck productivity is (and what to do about it) and Karl Smith (and Ryan Avent to a lesser degree) recently acknowledged as much. The productivity that drives monetary wealth is but a residual of the other factors which a business entity consolidates, and so productivity in that definition gets compromised as the service sector slowly takes over GDP. What that means in practical terms: while we might be fortunate enough to achieve continued growth overall 1) we don’t yet have a realistic way to measure the most important part of the process, and 2) the decrease in monetary productivity stats is skewing the measurements in general. To be sure, labor is still a real part of productivity in monetary terms but it continues to trend down and that needs to be remedied with new means of measurement.

  40. Gravatar of Bill Woolsey Bill Woolsey
    17. March 2012 at 03:37

    Becky:

    I support keeping nominal spending on output on a 3% growth path.

    I am not sure that determining the true meaning of productivity is necessary.

    I have never favored forecasting productivity year to year and adjusting nominal expenditure accordingly.

  41. Gravatar of ssumner ssumner
    17. March 2012 at 05:56

    MF, I opposed the moon program. But given they went ahead, I think it was all for the best that they relied on experts opinion, and not the masses, when the calculated orbits.

    Given we have a Fed, I don’t want my neighbors deciding the target.

  42. Gravatar of Major_Freedom Major_Freedom
    17. March 2012 at 07:46

    MF, I opposed the moon program. But given they went ahead, I think it was all for the best that they relied on experts opinion, and not the masses, when the calculated orbits.

    You missed the point. Your moon program analogy is moot because it was not a central economic planning program the way monetary policy is a central planning program.

    If the moon program were a central economic planning program, then the individual, from the elite scientist to the average Joe, should have full input into the central planning program!

    Why are you evading this? The average people should be entitled to have input into a central economic planning program that is imposed on their lives!

    Yes, leave the NON-central planning programs like the space program to the scientists. But then I will also say that the space scientists should not have any intellectual input in the restaurant business, or the car manufacturing business, and so on. In the division of labor, yes, let the experts in their respective fields take the risks, and have the intellectual input.

    But with central banking and monetary policy, you’re talking about a central economic planning program. That is NOT the same thing as letting the moon program to the scientists, the computer engineers to the computers, the chefs to the restaurants, and the car scientists to the cars.

    You’re comparing apples and oranges.

    Given we have a Fed, I don’t want my neighbors deciding the target.

    Hahahaha, don’t look now, but you just summed up exactly what I think as your neighbor.

    Given that we have a Fed, I don’t want YOU deciding the target.

    Indeed, who are you to even say there should be the “target” that you say should be “the” target? What makes you as your neighbor’s neighbor qualified to decide that there should be a target, and that this target is the “correct” target?

    You’re just secretly patting yourself on your own back and considering yourself to be the best intellectual dictator to run things. You believe “given we have a Fed, I declare myself to be the intellectual master of all, and that the Fed should do as I say, the Fed should accept my ideas, the Fed should adopt what I say should be adopted, the Fed should listen to me me me me me me me.”

    At any rate, what do those at the Fed know about your neighbor, or you, that you and your neighbor don’t know about yourselves? The Fed is allegedly “tasked” to plan you and your neighbor’s economic lives to a very important positive degree.

    What you are actually saying, and this is jaw dropping, is that you believe you are more intellectually capable of planning your neighbor’s economic life, then you believe your neighbor is capable of planning your own economic life.

    It’s like observing a dangerous beast in a cage. “Given” that the beast exists, and “given” that the beast attacks man, you don’t want your neighbor to be the beast tamer, you want yourself to be the beast tamer. You don’t trust your neighbor, but you expect your neighbor to trust you.

    Well I don’t trust you, I don’t think you’re capable of intellectually dictating the Fed, I don’t think ANYONE is intellectually capable of it.

    In other words, unlike you, I don’t look at the beast as say “Sumner! Save the people from despair!”, I instead view you and all other monetarists as a bunch of Don Quixotes.

    I look at that beast and I say “Sumner, with enough people who think honorably, and with integrity, rather than opportunistically trying to harness the power of the beast for themselves, we can instead join together intellectually and kill it once and for all.”

    As an intellectual, you should be defending your neighbor against the beast, and teaching your neighbor how to kill it. Not join in with all the opportunistic rabble rousers trying to gain control of the beast themselves at the expense of your neighbor, then dishonestly telling your neighbor it’s “all for his own good.”

    Meanwhile, if the beast should ever become controlled by those who share your foaming at the mouth opportunism, who attempt to use the beast “for good”, failure is again certain since the problem isn’t who is in control, it’s that there is someone in control. And yet you continue to dishonestly claim that the whole time you’d actually prefer it if the beast were dead. You can’t even see that as a tenured economist, you are in a position to do what you claim to be saying you prefer. You can become an anti-Fed advocate and you can’t get fired. But what did you do with that opportunity? You decided to join the Sith. What a waste. All those years of schooling and publishing…for nothing.

  43. Gravatar of UnlearningEcon UnlearningEcon
    17. March 2012 at 08:32

    Scott,

    Your textbook may include the qualifier about the multiplier and V being unstable but I can assure you that not all do. Other than that, you evaded the rest of my question and took a silly swipe. Seriously, come on.

  44. Gravatar of Desolation Jones Desolation Jones
    17. March 2012 at 11:17

    I found this interesting.

    http://articles.economictimes.indiatimes.com/2012-03-08/news/31135899_1_energy-prices-energy-costs-inflation-objective

    “The chairman said, ‘We think it is transitory, we are sticking to our guns, we are going to focus on the drag on income’,” Crandall said. Bernanke explained in his testimony how under a strategy of flexible inflation targeting, “a temporary spike in the price indexes can be a reason for the central bank to be more generous rather than less,” Crandall said.

    Drag on incomes? Could he be referring to nominal income/GDP?

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