It took 3 1/2 years, but I think they’ve finally got it

Britmouse recently linked to some comments by David Cameron:

Getting our debt under control is necessary for growth. But it’s not sufficient. Our responsible fiscal policy is being matched by active monetary policy. That’s the best way to support demand and help rebalance our economy away from debt-fuelled consumption and towards exports and investment. And the independent Bank of England is able to do more to support the economy if necessary or if inflation falls below their target.

Fiscal responsibility and monetary activism is the right macroeconomic mix for our over-indebted economy. But the additional ingredient that government will deliver and needs to do even more of is a radical programme of microeconomic reform to make our economy more competitive – including competitive tax rates, planning reform and deregulation.

Unfortunately he’s not getting much help from the BOE, as NGDP growth in anemic.  They also need Swedish-style micro reforms, but it’s unlikely that the British public would stomach those sorts of laissez-faire policies.  I think Cameron needs to bite the bullet and can call for 5% NGDP targeting for three years, and 4.5% thereafter, even though he’d get criticism from within his party.

And here’s something right off the wire:

Obama stressed that events in Europe held “extraordinary” importance for the United States, which unlike the eurozone is growing, albeit slowly.

He said that the G8 summit, which he will convene at his Camp David retreat later Friday, would discuss “a responsible approach to fiscal consolidation that is coupled with a strong growth agenda.”

Meanwhile, Hollande said growth must be the priority, maintaining his stance that austerity measures alone would be insufficient to reverse the crisis in Europe.

In an attempt to smooth over the split within the G8, other European leaders stressed that austerity and stimulus are not mutually exclusive.

“We need to take action for growth while staying the course in terms of putting our public finances in order. Stability and growth go together, they are two sides of the same coin,” European Commission President Jose Manuel Barroso said ahead of the summit.

So let’s see, how do we get austerity and stimulus at the same time?  How about easy money and deficit spending?  No, that won’t work.  Tight money and budget surpluses?  No.  Tight money and big deficits?  Hell no, that’s what we’ve been doing.  That’s how we got into this mess.  How about easy money and budget surpluses?  Bingo.  That’s a growing NGDP and budget surpluses—the Swedish way.

Glad to see Cameron/Obama/”European leaders”/Hollande/Barroso  have finally seen the light.  Now do it.

PS.  And what tiny band of obscure bloggers has been pushing this policy for 3 1/2 years?


Tags:

 
 
 

32 Responses to “It took 3 1/2 years, but I think they’ve finally got it”

  1. Gravatar of Jim Glass Jim Glass
    18. May 2012 at 18:35

    Martin Wolf just blew an old-fashioned rant about this, venting the argument from incredulity through his ears.

    Cameron is consigning the UK to stagnation

    “With real interest rates close to zero – yes, zero – it is impossible to believe that the government cannot find investments to make itself, or investments it can make with the private sector, or private investments whose tail risks it can insure that do not earn more than the real cost of funds. If that were not true, the UK would be finished … It is refusing to take advantage of the borrowing opportunities of a lifetime…”

    More spending! More spending! A deficit of 11% of GDP when not in recession clearly as wasn’t near enough — so of course more will be.

  2. Gravatar of marcus nunes marcus nunes
    18. May 2012 at 19:03

    There´s a saying in portuguese which loosely translated goes like this: “Soft water on hard stone drips, drips until a hole lets it go through”.
    Let´s keep “dripping”! And pronounce “IT” DEAD:
    http://thefaintofheart.wordpress.com/2012/05/18/a-last-ditch-defense-of-inflation-targeting/

  3. Gravatar of maximillian maximillian
    18. May 2012 at 19:06

    the question is: with a market monetarist fed chairman (based on early 2000s paper) and record low inflation expectations (http://www.clevelandfed.org/research/data/inflation_expectations/) they’re not hitting a reasonable inflation target, how do we expect they hit an NGDP target?

    the economic case is pretty convincing, now the public choice aspects need to be resolved.

  4. Gravatar of fernando fernando
    18. May 2012 at 19:17

    “How about easy money and budget surpluses? Bingo. That’s a growing NGDP and budget surpluses—the Swedish way.”

    For how long should the government run a budget surplus?

  5. Gravatar of David Cameron on the euro crisis « The Market Monetarist David Cameron on the euro crisis « The Market Monetarist
    18. May 2012 at 20:45

    [...] Scott Sumner now also have a comment on Cameron’s speech – unfortunately Scott misses the important European dimension of [...]

  6. Gravatar of W. Peden W. Peden
    18. May 2012 at 20:47

    Fernando,

    That’s a non-issue, because budget surpluses won’t last too long under normal circumstances. Just as the amount of time required to do anything increases with the amount of time available and the amount of bureaucracy required to do anything increases with the amount of bureaucracy in existence, so the amount of public spending increases with the revenues to fund more public spending.

    Once debt-to-GDP ratios were back on a secularly declining path, you would find that the surpluses “disappeared” through increased public spending and tax cuts within a few years, just like the Clinton surplus. (Insofar as that was a surplus at all.)

  7. Gravatar of dwb dwb
    18. May 2012 at 20:51

    Dallas Fed president Fisher (whos favorite subject is fiscal policy): this post is for you. NGDPLT makes life simpler for fiscal conservatives. voters reject simultaneous tight money, tight fiscal policies. stick to both and at the end of the road we have ARRA 2.0 in 2013.

  8. Gravatar of Morgan Warstler Morgan Warstler
    19. May 2012 at 00:36

    The point is, the gvt. has to bend before the ed does.

    Greece has to bend before Germany does.

    Once you aren’t running a current account deficit, easy money can flow easily.

    Oh Karl….. the ball has moved down the field on you.

    Whats your goal line stance look like Karl?? Can’t wait to find out.

  9. Gravatar of Rob Rob
    19. May 2012 at 03:50

    Cameron has been using the “fiscal conservative/monetary activist” line for some time now. The earliest recorded usage seems to be October 2010 – this Bloomberg report seems to suggest that Cameron and Osborne were putting pressure on Mervyn King to deliver more QE in order to offset the contractionary effects of budget cuts at the time. This somewhat undermines the argument that if only they had adopted this policy sooner, the situation would be vastly improved – it turns out that they have been adopting vaguely market monetarist policies for the last couple of years with, thus far, no obvious benefit. Understanding what’s going on here is an important test of market monetarism.

    King’s recent quarterly inflation report (doesn’t the fact that they have a quarterly inflation report but not a quarterly GDP report tell you something?) did basically confirm that the BoE is quietly targeting NGDP. King announced that the BOE’s RGDP projections are lower (0.8% from 1.2%) than previously, and, quite coincidentally, their inflation projections are now higher. In other words, they expect NGDP to be stable even if RGDP falls. The problem here is that NGDP is stable but still somewhat low. The Bank’s projections show inflation falling below 3% by the end of the year which, combined with the 0.8% RGDP growth, suggests a historically low level of NGDP growth even now.

    I suppose Market Monetarists would have to argue that the Bank’s mistake here is twofold: firstly, if they’re targeting NGDP then they should be telling everyone that they’re doing it (I like to draw an analogy with the Russian Doomsday Device in Dr. Strangelove) so as to improve expectations; secondly that they should be aiming for a higher NGDP target than “somewhere below 4%”. I think Market Monetarists need to pay close attention to the UK situation though, because it currently resembles “market monetarism done badly” and, as such, has the potential to tarnish the whole idea.

    There’s one big reason why the two problems above might be difficult to solve: a lot of UK economic commentators, and Conservative politicians (a group with a lot of social overlap) believe that inflation is currently too high, and anything that might increase it must be bad. Making a formal policy to do so would terrify them. And Cameron’s grip on his own party is getting weaker by the day, although this has more to do with culture war issues and less to do with economic policy. All of this means that for Cameron to embark on an adventurous new economic policy might be seen as a “brave” thing to do right now.

  10. Gravatar of Bill Woolsey Bill Woolsey
    19. May 2012 at 04:30

    The market monetarist view is that spending on output should grow at a slow stable rate. This is inconsistent with seeking to keep the unemployment rate at some target level. Market monetarists predict that keeping spending on output growing at a slow stable rate will result in the unempoyment rate remaining very close to the unobservable and changeable natural unemployment rate, but we do not favor trying to estimate the natural unemployemnt rate and then compare it to the actual unemployment and vary nominal spending on output to bring the unemployment rate to the natural rate. The usual approach (which is consisent with market monetarist reasoning) would be that if the actual unemployment rate is above the natural unemployment rate then increasing spending on output (shifting it up to a higher growth path) would bring the unemployment rate down to where it should be. If the actual unemployment rate were below the natural unemployment rate then lowering spending on output (shifting it to a lower growth path) would tend to raise the unemployment rate to where it should be.

    Market monetarists may not agree with all of Hayek’s reasoning, but we agree that that targeting the unemployment rate, even when the target is an estimate of a changeable natural unemployment rate, is a bad idea. Treating the unemployment rate as a kind of goal target, like 4% is desirable, and then varying spending on output to try to keep actual unemployment there, ignoring any market forces that might tend to change the unemployment rate, is a recipe for disaster. Hayek was really criticizing that approach.

    This is closely related to the “Taylor rule” approach of varying spending on output to close output gaps. The problem is the same. Potential output is changeable and unobservable. While shifting spending on output to a slower growth path if output is above potential, and raising it to a higher growth path if output is above potential is plausible, that potential output is unobservable is a problem.

    The output gap only policy rule is potentially disasterous. This is paritcularly true if real output is treated as a target–it must stay on a 3% stable growth path. But even if it is recognized that potential output can (and should) change sometimes, that it is unobservable is a serious problem.

    So, the market monetarist approach is to keep spending on output growing at a slow, steady pace, and output, prices, employment, and unemployment all depend on market forces.

    K:

    An explicit target for nominal GDP is much better than an making promises that the policy interest rate will stay unusually low for an extended period of time or until 2014, or that certain amounts of certain assets will be purchased.

    Targets for unemployment are inappropriate because they trully might not be attainable. We will keep interest rates unusually low until the unemplloyment rate reaches 6%, but only if the inflation rate does not exceed 2%, is unlikely to help much. (The only change from the status quo is a specific target for the unemployment rate.)

    A nominal GDP growth path can almost certainly be attained eventually. It is a series of levels going out into the future. If the Fed says it is trying to reach the growth path in one year (or two) and it fails, then it just keeps trying to hit the still higher growth path. This could occur though higher real output (and lower unemployment) or it could occur though a higher price level (and so higher inflation.)

    We will only raise spending on output if inflation doesn’t go above 2% is a roadblock. Some people might think this isn’t possible (without the higher inflation) and so they will not increase spending. Now, they might be wrong. And when spending rises, maybe inflation won’t rise. But the actions they need to take can be blocked by the committment to prevent inflation.

    As for the notion that having the central bank buy up the entire national debt so that base money is slightly greater than the target for nominal GDP is that same thing as a central bank promising to keep its policy rate low for an “extended period” requires remarkable faith in some very simple models.

  11. Gravatar of Mike Sax Mike Sax
    19. May 2012 at 04:36

    “The point is, the gvt. has to bend before the ed does.”

    “Greece has to bend before Germany does.”

    Morgan that’s exactly why there’s no sale. Basically the two sides have guns drawn and you say “You guys first after we promise to put ours down.”

    This is what I said before-you say austerity first. Then monetary loosening. Why not starte loosening first and if this solves things then we can listen to you abotu your “supply side” reforms?

    Your way is asking for all the trust to be on our side all control on yours. Greece isn’t going to bend this time. If the EU really believes Greece leaving wont hurt-depsite the clear signs already of contagion in Italian and Spanish yields and that the bank runs in Greece will come likely come to these other countries next-I think we will find out soon.

  12. Gravatar of Thomas Hannaford Thomas Hannaford
    19. May 2012 at 05:25

    As much as it gives me the warm and fuzzies to hear this, I’m more optimistic about Cameron’s words than either Hollande’s or Obama’s. Maybe I’m just being cranky, but the vibe I’m getting from O/H is that they are firmly entrenching themselves in the “Fiscal stimulus is teh only wayz!” camp…I mean, haven’t they been publicly reviving that whole “Global minimum tax” crap again?

    At any rate, cheers Mr. Cameron! I see my recent term paper on how to survive the EU crisis made its way across the pond ;) (of course, the paper would not have been nearly as good were it not for the MM blogosphere! Keep up the good work *virtual pat on the back*)

  13. Gravatar of Morgan Warstler Morgan Warstler
    19. May 2012 at 05:50

    Sax, I already answered this. Please let it sink in.

    Moving to NGDPLT enthrones / embeds the Germany over Greece (Private over public, Fed moves last) model into everything.

    I wrote it out for you in steps. If you start with NGDPLT today, with or without makeup, the MOMENT we bump into the 4.5% (I say 3%) growth cap, we start to cut govt. regulations and demand public employees make productivity gains (fire them).

    This just happens. Now before NGDPLT happens….

    This isn’t two side have guns drawn.

    The Fed and Germany both have a guns pointed, and the you and Greece are choosing to keep suffering rather than bend.

  14. Gravatar of Mike Sax Mike Sax
    19. May 2012 at 05:59

    Sure it is. When Greece leaves the Euro which they will if you and Merkel keep ut with your our way or the highway line you’ll see Greece has a gun and has used it.

    I know you’ve gone through stuff before but I haven’t been convinced. Your 3% of course would mean that the Fed should cut now. In other words you want both fiscal usterity and monetary tightening.

    You keep wanting to spin this as I don’t understand something. I get it entirely Morgan which is why I’m not biting.

    It isn’t working in Europe no more as all the eletions are going aginst the austerity loving incumbents and right now in the US if Boehner insists on following through with his “My way or the highway” brand of “negotiations” the Dekmocrats will take the highway and we’ll finally have an end to the Bush tax cuts which I have always hated anyway.

  15. Gravatar of Mike Sax Mike Sax
    19. May 2012 at 06:05

    Scott thw one option you don’t mention is fiscal easing and doing nothing on fiscal policy, neither more spending but not less than current even.

    Not that this is my preference but as a matter of logic. The problem is you insist as interpreting a government deficit as proof that their’s been wild government spending and apparently don’t grasp that a budget deficit can go up with a drop in revenues.

    I deny there’s been much fiscal stimulus. There have been cut backs everywhere. In the US we had that one fiscal stimulus that should have been more. Since then we’ve had all these cuts at the state level. But austerity doesn’t bring down deficits in such depressed environments.

  16. Gravatar of Mike Sax Mike Sax
    19. May 2012 at 06:07

    What no one has come close to convincing me of is that there’s any reason to care about deficits in the middle of a recession in countries like the US and UK that can print their own money.

    US borrowing costs on the 10 year Treasury were recently the lowest on record.

  17. Gravatar of ssumner ssumner
    19. May 2012 at 07:44

    Jim Glass, That sounds awful, but I can’t get the link to work.

    Marcus, Yes, keep pushing.

    Maximillian, Yes, the public choice aspect is the tough part.

    Fernando, Until the US public debt is less than 50% of GDP.

    dwb. That’s right.

    Rob, I think it’s important to distinguish between political problems and economic problems. I agree that Cameron might not have the necessary influence to push through a true market monetarist policy. In that case they’ll fall short. In addition, Britan has supply-side problems that can’t be solved with market monetarism.

    I’ve been predicting policy failure in Britain for quite some time. The government doesn’t seem strong enough to push trhough aggressive supply side reforms, and it seems they fear a higher NGDP target would be too controversial.

    There are two ways MM could be discredited in the US. Monetary policy makers might be unable to hit a NGDP target (extremely unlikely in my view) or higher NGDP growth might not translate into higher RGDP growth (very unlikely in my view.)
    In the UK case stagflation is somewhat more likely.

    Bill, I agree we shouldn’t target unemployment.

    Mike Sax, You said;

    “The problem is you insist as interpreting a government deficit as proof that their’s been wild government spending and apparently don’t grasp that a budget deficit can go up with a drop in revenues.”

    Or really? When did I say that?

  18. Gravatar of ssumner ssumner
    19. May 2012 at 07:48

    Thomas, You are probably right, but at some point they’ll have to realize that a puny fiscal measures won’t stop the onrushing tsunami of tighter money and falling NGDP growth.

    They aren’t stupid.

  19. Gravatar of Mike Sax Mike Sax
    19. May 2012 at 08:15

    Well you certainly infer it when you say this “Tight money and big deficits? Hell no, that’s what we’ve been doing.”

    Or when you claim that Cameron hasn’t done austerity in Britian because there’s a budget deficit.

  20. Gravatar of Mike Sax Mike Sax
    19. May 2012 at 08:15

    Well you certainly infer it when you say this “Tight money and big deficits? Hell no, that’s what we’ve been doing.”

    Or when you claim that Cameron hasn’t done austerity in Britian because there’s a budget deficit.

  21. Gravatar of Mike Sax Mike Sax
    19. May 2012 at 08:17

    Oops double post-how did that happen?

  22. Gravatar of Jim Glass Jim Glass
    19. May 2012 at 09:50

    The Martin Wolf link:
    http://www.ft.com/intl/cms/s/0/5853d1c0-9ea9-11e1-9cc8-00144feabdc0.html

  23. Gravatar of Negation of Ideology Negation of Ideology
    19. May 2012 at 09:57

    Rob – Newsweek quoted Cameron describing himself as a fiscal conservative and monetary activist as well. To me, the important question is how much he’s willing to push the Central Bank. He has an advantage over the leaders of France and Greece, because Thatcher kept Britain’s sovereignty.

    I think there’s a good chance market monetarism will start in Britain, then the US, and finally in the Eurozone.

    And Mike Sax and Morgan – you could have market monetarism with federal spending of less than 1% of GDP or more than 50%. The economic argument (some would say excuse) for deficits as stimulus would be gone, but there would still be plenty of room to debate the level of defense, infrastructure and redistributional spending. Those of us on the pragmatic right believe that without all those unnecessary nominal shocks to the system there will be less need for redistribution, therefore overall spending will be lower. And without huge deficits, net interest cost will be lower.

    But people on the pragmatic left should be happy with that. My understanding is that progressives aren’t for big government for its own sake, they want lower poverty and more economic security. If elimating one of the major causes of poverty and economic insecurity (nominal shocks) has a side effect of reducing overall government spending, that’s a solid victory for progressives.

  24. Gravatar of Kevin Donoghue Kevin Donoghue
    19. May 2012 at 11:16

    Only vaguely related, but I think Scott might like it:

    In October we (me, Wolf, Wren-Lewis) were “outer fringes” http://www.telegraph.co.uk/news/politics/georgeosborne/8687908/George-Osborne-Britain-is-leading-the-way-out-of-this-crisis.html Now we’re “dangerous” http://www.number10.gov.uk/news/pm-economy-speech/ This is progress!

    https://twitter.com/#!/jdportes

  25. Gravatar of Desperadoes – pushing fiscal “stimulus” | Historinhas Desperadoes – pushing fiscal “stimulus” | Historinhas
    19. May 2012 at 11:34

    [...] the other side we get the “pursuers of truth” spearheaded by Scott Sumner who writes: So let’s see, how do we get austerity and stimulus at the same time?  How about easy [...]

  26. Gravatar of Morgan Warstler Morgan Warstler
    19. May 2012 at 12:11

    “But people on the pragmatic left should be happy with that. My understanding is that progressives aren’t for big government for its own sake, they want lower poverty and more economic security. If elimating one of the major causes of poverty and economic insecurity (nominal shocks) has a side effect of reducing overall government spending, that’s a solid victory for progressives.”

    Tell that to public employee unions.

    Under NGDPLT, they eat it.

  27. Gravatar of Mike Sax Mike Sax
    19. May 2012 at 12:39

    “you could have market monetarism with federal spending of less than 1% of GDP or more than 50%. The economic argument (some would say excuse) for deficits as stimulus would be gone, but there would still be plenty of room to debate the level of defense, infrastructure and redistributional spending. Those of us on the pragmatic right believe that without all those unnecessary nominal shocks to the system there will be less need for redistribution, therefore overall spending will be lower. And without huge deficits, net interest cost will be lower.”

    Well Negation that’s an important clarification. When I listen to many Market Monetarists while NGDPT does sound like an improvement over inlfaton targeting-which I’ve always hated, I mean who cares about price stability if you’re out of rich or can’t pay your bills, it seems inflation is a fetish for bond holders and coupon clippers-but listening to guys like Morgan-not only him-it seems that right away this is going to lead to public employee unions “eating it.”

    For me if you do NGDPT and there’s no need after that for as much economic redistributioin fine-though I admit I’m quite skeptical. But that’s a choice I’d only make after it delivers the goods not before. David Cameron for instance has been doing austerity before NGDPLT has deliverd the promised benefits.

  28. Gravatar of Negation of Ideology Negation of Ideology
    19. May 2012 at 15:51

    Fair point, Mike Sax – I agree with you. While Morgan’s a very smart guy who thinks outside the box, he seems to think of market monetarism as part of the right. I prefer to think of it as broader than that. I’d rather see it become the consensus of both major parties. I don’t want to chase a single pragmatic progressive away from it.

    And I want to clarify that I don’t believe it will get rid of the need for all redistribution. I just notice that the 20′s had less need for it than the 30′s, and the 25 years before 2008 had less need than today. Periods of stable NGDP level growth require less spending on the poor simply because less people are poor. If NDGPLT or something like it had been implemented in 1930, or 2009, I think things would have turned out very differently.

    I also agree with you that doing austerity before increasing NGDP closer to its pre-crisis path is not likely to work. We should do NGDPLT first, see how much the deficit drops on its own, and then attack whatever deficit remains, if any.

  29. Gravatar of Steve Steve
    19. May 2012 at 18:03

    Here’s my issue:

    How do we tell if monetary policy has been too tight or too easy? We look at NGDP. It’s nice and easy.

    How do we tell if fiscal policy has been too tight or too easy? Anyone? There aren’t really any objective measures. I guess once NGDP is on a stable trend, then we can estimate the structural balance.

    That’s why I hate even having the debate over fiscal austerity vs stimulus. It distracts from understanding the monetary disorder, and it alienates the political partisans.

  30. Gravatar of Mike Sax Mike Sax
    19. May 2012 at 18:11

    “While Morgan’s a very smart guy who thinks outside the box, he seems to think of market monetarism as part of the right. I prefer to think of it as broader than that. I’d rather see it become the consensus of both major parties. I don’t want to chase a single pragmatic progressive away from it.”

    Seems like a rational attitude to me Negation. Why would you not want as big a tent as you can pitch. I do agree that Morgan’s an itneresting-and yeah maybe kind of smart guy-but he wants to make the circle smaller.

    Basically if MM becomes just something for conservatives and Republcians it will have a much harder time.

  31. Gravatar of Major_Freedom Major_Freedom
    20. May 2012 at 14:10

    Morgan:

    Tell that to public employee unions.

    Under NGDPLT, they eat it.

    You keep telling this story, but the story doesn’t fit the facts.

    We’ve had de facto constant NGDP growth for many periods in US history where the size of the state (in terms of number of state employees divided by the total number of non-farm employees), as seen in this chart.

    I see many periods of roughly stable NGDP growth, and yet there were increases in the relative number of state employees to all (non-farm) employees. Take the 1960s for example.

    The way to limit the amount of state employees is philosophical in nature, not monetary in nature.

  32. Gravatar of ssumner ssumner
    21. May 2012 at 04:34

    Mike Sax, No, deficits are not equal to government spending, I thought that was obvious. The deficit is spending minus taxes.

    Jim Glass. Just a horrible article, did he mention monetary policy even once?

    Kevin, The speech is way too long for me–anything of interest?

Leave a Reply