Here I’ll try a couple analogies to better explain earlier posts on causation and NGDP targeting. As you will soon see, my literary skills are at the 5th grade level.
Captain Ben is piloting a large ocean-going cruise ship toward the open ocean, but must steer between two sandy headlands. A steady wind is pushing the ship to the left, toward one of the sand-bars. The captain has plenty of time to adjust the rudder and engine controls to counteract the wind, but reacts too slowly and the ship continues to drift to the left, eventually getting stuck on the sandbar. Did the captain cause the accident through negligence, or did the wind cause the accident?
Not much of an analogy so far, but let’s add a few new elements to correspond to my earlier causation post.
Now assume the control room is full of a couple dozen other experienced ship captains who are on the cruise, and one trainee. None of the ship captains suggest Ben is doing too little to offset the wind; most say he is doing all he can and a few even suggest he is doing too much, arguing “we don’t really know whether this wind will persist.” Only the trainee thinks the Captain is doing too little, and he becomes increasingly agitated as the ship seems to be drifting to the sandbar on the left. His suggestions grow more and more frantic:
“Turn the wheel further to the right; you haven’t turned it as far as it will go.”
“Turn on the auxiliary quickfiring ejectors (side mounted water jets that help steer the ship in close quarters.)”
“Don’t you see we’re headed right for the sandbar!”
Eventually the captain did turn the wheel all the way to the right, but the trainee kept on babbling on about the quickfiring ejectors:
“If you wait till we hit the sandbar the QEs won’t be nearly as effective!”
“You must act now!”
The other ship captains mocked the trainee mercilessly:
“That’s right, give her all she’s got, Scotty”
Some whispered that he had gone to one of those fresh water training schools, where they learned how to steer “boats” on the Great Lakes.
“That poor fool just doesn’t understand what’s involved in steering the big ships in salt water.”
“Yeah, he’s originally from the Midwest.”
Eventually the ship did get stuck on the sandbar. The passengers were told it might be months before the ship could be dislodged. There was great concern about what would happen to their jobs after such a long period of unemployment.
Now the QEs were finally turned on, but the ship responded very slowly, as most of the hull was still stuck on the sandbar.
“Ha, just as I thought, those QEs are not very effective; I knew that trainee was babbling nonsense.”
OK, the story is both silly and self-indulgent, but what about the question of causality, did the captain cause the accident? In my earlier post (here) I argued that it was hard to assign moral culpability if most other experts would have done the same. So Captain Ben cannot be “blamed” for the accident. On the other hand if there is an alternative steering “policy” that would have prevented the accident, and if the captain had plenty of time to react, then one could say the accident was caused by not setting the steering mechanism at the right position. I don’t think anyone would be so foolish as to argue the captain could only be said to have caused an accident if he turned the steering the wrong way. Even a policy of holding the steering wheel steady could be said to cause an accident when there is an obvious bend in the river straight ahead.
So how do we prevent these accidents in the future? The answer is to encourage “back seat drivers.” Yes, I understand that my overwhelmingly male readership is almost all composed of above average drivers, make that well above average. And I’m pretty sure most of you don’t like back seat drivers. But is there really anything wrong with an occasional nudge?
I’m not going to spell out the NGDP targeting plan again, it’s discussed here. But I did notice that many commenters were concerned about what would happen if nobody entered this policy market. My response is that nothing bad would happen. At the beginning of each day the Fed should set the base at a level expected to produce on target growth (say 5% NGDP growth.) If no one enters the market, then we can presume that traders think the Fed is doing a pretty good job. And that would be fine.
On the other hand last September and October it was obvious to me that NGDP growth was going to come in well below target. I might have waited a few days to see if the market jumped in, but if they didn’t I would have grabbed the wheel and yanked it to the right with all my strength, or should I say all my dollars. We’ve all complained about Fed policy, wouldn’t it be nice to be able to put our money where our mouth is. Why should just one captain, or even twelve, have all the fun.
Yes, I know that 99.9% of the time backseat drivers are annoying. But there is always that one time when they point out the child, or dog, or red light you didn’t see. In that case isn’t it better that they say something, rather than keep their mouth shut?