John Taylor on the BIS critique of current monetary policy

Here’s a new post by John Taylor, which discusses a recent BIS report on monetary policy:

BIS analyses often contain useful warnings, including their prescient warning in the years around 2003-2005 that monetary policy was too easy, which turned out to be largely correct, as the boom and the subsequent bust made so clear. So the Annual Report is always worth reading.

That’s not clear to me; indeed NGDP growth wasn’t unusually high during the 2000s.  Taylor continues:

This is especially true of the Annual Report released today because it devotes a whole chapter to serious concerns about the harmful “side effects” of the current highly accommodative monetary policies “in the major advanced economies” where “policy rates remain very low and central bank balance sheets continue to expand.” Of course these are the policies now conducted at the Fed, the ECB, the Bank of Japan, and the Bank of England. The Report points out several side effects:

  • First, the policies “may delay the return to a self-sustaining recovery.” In other words, rather than stimulating recovery as intended, the policies may be delaying recovery.
  • Second, the policies “may create risks for financial and price stability globally.”
  • Third, the policies create “longer-term risks to [central banks’] credibility and operational independence.”
  • Fourth, the policies “have blurred the line between monetary and fiscal policies” another threat to central bank independence.

If you simply replaced the word “accommodative” with “contractionary” I would be in complete agreement with Taylor.  And that’s actually pretty mind-boggling, when you think about it.  It’s not that strange that we might differ on whether current monetary policy is contractionary or accommodative (although non-economists must be appalled that economists can’t even agree on something as basic as that.)  What’s really shocking is that we even agree on the four effects from that monetary policy, even though logically one would think that accommodative policies would produce the exact opposite effect from contractionary policies.  To make this point clearer, consider the fifth effect quoted by Taylor, which I omitted:

  • Fifth, the policies “have been fueling credit and asset price booms in some emerging economies,” thereby raising risks that the unwinding of these booms “would have significant negative repercussions” similar to the preceding crisis, which in turn would feed back to the advanced economies.

Since I think policy has been contractionary, I obviously can’t agree with that fifth effect.  But I do agree with the first four!!

How can this be?  How can two economists disagree on something so fundamental?  It would be like two physicists disagreeing on whether a rising bar of mercury in a thin glass tube indicates rising or falling temperatures.  No, it’s even worse.  It would be like one scientist saying it indicates rising temps, and arguing that’s why ice is melting, and the other arguing that it indicates falling temps and arguing that’s why ice is melting.  I.e. that H2O has the property of melting when things get really cold.

So the next question is; who is the crackpot who thinks a rising bar is colder temperatures, and who also thinks water melts when it gets really cold.

Obviously I don’t think either of us is a crackpot.  And I freely acknowledge that I’m in the minority here, so that if there is a crackpot it’s probably me.  But nonetheless let me try to explain how (I believe) most of the profession ended up being wrong here.

1.  Although I’m in the minority, Milton Friedman argued that ultra-low rates are a sign that money has been tight (in reference to Japan in 1997.)

2.  Ben Bernanke said in 2003 that neither interest rates nor the monetary aggregates were good indicators of monetary policy, and that only aggregates such as NGDP and the CPI are reliable indicators of the stance of monetary policy.  If you average those out, then you notice that the growth rate of nominal aggregates since mid-2008 has been the slowest since Herbert Hoover was president.

Here’s where I think Taylor went wrong.  He has money being very accommodative in 2003, 2004, 2005, 2008, 2009, 2010, 2011, 2012.  OK, then tell me how all this accommodative policy brought us the slowest NGDP growth since the early 1930s?  Why has headline CPI inflation averaged 1.1% since July 2008?

To go back to my temperature analogy, I’m claiming that NGDP and the CPI are the melting ice.  We can disagree about whether a rising bar of mercury means that temps are rising or falling, but surely we can all agree that melting icecaps show it’s getting warmer.

And we can disagree about whether ultra-low interest rates and a bloated monetary base indicate easy or tight money, but surely we can all agree that ultra-slow NGDP  and CPI growth are signs of tight money?

So how did Bernanke (in 2003), Friedman, and I end up in the minority?  (So much so that even Bernanke’s jumped ship, calling current Fed policy accommodative even though his 2003 criteria suggests it’s ultra-tight.)

Monetary economics is a very strange field.  As long as things are fairly normal (as during the Great Moderation) economists of wildly differing stripes see things in roughly the same way.  Day-to-day adjustments in monetary policy are done via the liquidity effect, which means an unexpected rise in the Fed’s target rate really is contractionary, relative to the alternative.  In addition, velocity is reasonably stable, so countries with higher trend inflation tend to have higher trend rates of growth in the money supply.  Both Keynesianism and old-style monetarism have some validity—both the interest rate and the money supply seem at least slightly informative.

Now go to much higher inflation rates, such as the 1970s, or even better the Latin American hyperinflations.  Now the Keynesian focus on the liquidity effect looks hopelessly out of touch, as interest rates are no longer very informative.  Even worse for the Keynesians, monetarist ideas hold up pretty well.  Yes, velocity speeds up, but not so much as to overturn the money/price level correlation—high inflation is associated with faster growth in M, and hence the money supply looks like a better policy indicator when inflation is high.  Throughout history the quantity theory always becomes popular when inflation is high.  Not just during the 1970s, both Wicksell and Keynes flirted with the QTM during the early 1920s European hyperinflations, despite their previous and subsequent bias towards interest rates as an indicator.)

Now go to much lower inflation rates, and especially a situation where nominal interest rates fall close to zero.  Now both the Keynesian and monetarist indicators break down.  If tight money created the fall in NGDP which drove rates to zero, then Keynesians will misdiagnose tight money as easy money.  Even worse, monetarists will make the same mistake.  The reason is complicated, but it has to do with the fact that velocity falls very sharply near zero.  So central banks are forced to massively increase the ratio of base money to NGDP, to avoid severe deflation.  But since prices and NGDP are  fairly stable, the huge rise in the base/NGDP ratio means the nominal monetary base also rises sharply.  That means the nominal base is sort of U-shaped, high in both liquidity traps and hyperinflation, and more modest during Great Moderations.  So both monetarists and Keynesians tend to misdiagnose monetary policy during periods of ultra-low rates.

During the 1970s, the monetarists were able to show how Keynesians got it wrong, by pointing to the fast growing money supply.  Then the vast majority of economists in the middle, who are open to pragmatic arguments, could say to themselves “OK, the monetarists are right, obviously if people need wheelbarrows of money to buy a loaf of bread, then money is not “tight” no matter how high the interest rate is.”  But when we get to ultra-low rates and both the interest rate and the money supply signals are giving off false readings, then there is no one to correct the Keynesians.  The (old style) monetarists are just as wrong.  And we market monetarists are not influential enough (yet) to overcome the near universal view that money has been accommodative in recent years.

I’ve never studied topology, but I wonder if there isn’t an analogy here for the saddle point surface.  The Great Moderation is like the sweet spot where things are locally flat, and Cartesian in all four directions.  But when you move away from that point then both money supply and interest rate indicators become hopelessly unreliable.  And monetary policy breaks down.  The high inflation breakdown is less complete, because the money supply indicator still works somewhat.  But the low inflation/interest rate breakdown causes mass confusion among policymakers, and may require some solution that involves thinking outside the box.  In the 1930s that involved leaving the gold standard and devaluing the dollar—with the price of gold being the alternative indicator/instrument, when interest rate adjustments and/or QE weren’t working.  Who will produce the out-of-the-box thinking required for our modern crisis?

I think you know where I’m putting my money.

PS.  Take a look at the 5 BIS bullet points quoted by Taylor.  Isn’t number one damn close to “low temps cause water to melt.”


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107 Responses to “John Taylor on the BIS critique of current monetary policy”

  1. Gravatar of Adam Adam
    25. June 2012 at 08:41

    I was just discussing this same issue in the comments on Yglesias’s blog, touched off by a post from Matt quoting Stiglitz as saying that low rates encourage investment in capital and discourage hiring labor. http://www.slate.com/blogs/moneybox/2012/06/25/low_interest_rates_don_t_discourage_hiring.html#article_comment_box

  2. Gravatar of Neal Neal
    25. June 2012 at 08:56

    You might make a better analogy from physics than math, by looking at the ultraviolet catastrophe, Wien’s law, and Planck’s law.

  3. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    25. June 2012 at 09:01

    The Chicago Tribune has an article on Charles Evans;

    http://seattletimes.nwsource.com/html/businesstechnology/2018512789_inpersonfederalreserve.html

    unfortunately, it has its shortcomings;

    ————–quote————
    Evans joined the Chicago Fed’s research department in 1991, a few years after finishing his doctorate in economics from Carnegie Mellon University in Pittsburgh. Martin Eichenbaum, his adviser at Carnegie Mellon who had moved to Northwestern University, recruited him to Chicago from the University of South Carolina, where Evans was teaching.

    The pair joined Lawrence Christiano, another Northwestern economics professor, to begin looking at how monetary policy affects the economy. Their research ran counter to the conventional wisdom in the 1980s that the economy was best left to its own devices and that growing or contracting the money supply had little influence.

    After about 10 years of research, they came up with a formula that recognized the importance of monetary policy, turning conventional wisdom on its head.

    “That work has caused all three of us to change our views about how the economy was put together,” Christiano said.

    They weren’t the only economists coming to the same conclusion around the same time. This new way of thinking about monetary policy has been embraced by economic giants such as Bernanke and has influenced central bankers around the world.
    —————endquote————–

    You’re from Chicago, and haven’t heard of Milton Friedman?

  4. Gravatar of DonG DonG
    25. June 2012 at 09:29

    Last weeks EconTalk podcast was all about the differences between what is provable in Economics v. Physics. A good listen. Even Newtonian physics, our most intuitive friend, breaks down at small scales and large velocities.

    Speaking of physics, my daughter has been working on a teleporter. When that is ready, expect an explosion of productivity that will lead to lower NGDP and CPI.

  5. Gravatar of TallDave TallDave
    25. June 2012 at 09:31

    I see too many people are looking at the disastrous Fannie/Freddie-driven housing bubble and saying “Aha, monetary policy was too loose!” when in fact those are different things.

    The CPI debate has some funny twists — if we overstate CPI, some groups tend to get more money from programs tied to CPI, which makes those groups happy. But at the same time, if CPI is overstated then there’s been less actual inflation than we thought (which tends to jibe with what we see in terms of actual living standards vs wages) which means monetary policy has been tighter than it appears, and that’s bad for most people.

  6. Gravatar of Doug M Doug M
    25. June 2012 at 09:35

    “BIS analyses often contain useful warnings, including their prescient warning in the years around 2003-2005 that monetary policy was too easy, which turned out to be largely correct, as the boom and the subsequent bust made so clear. So the Annual Report is always worth reading.

    That’s not clear to me; indeed NGDP growth wasn’t unusually high during the 2000s.”

    NGDP growth 2003-2006 — I see 6+%. Wouldn’t this be considered “easy” by the market monitarist’s definition?

    I am haveing a bit of trouble with this NGDP targeting. The historical rate of NGDP growth is dependant upon the endpoints. NGDP is growing at 4% for the last 2 and a bit years — trough to present — and 1% peak to present. What is the apropriate “lookback”? Ideally, we would want forward looking indicators of NGDP growth. I would peg that at closer to 4% than 1%.

    as an asside…

    “How can two economists disagree on something so fundamental? It would be like two physicists disagreeing on whether a rising bar of mercury in a thin glass tube indicates rising or falling temperatures. No, it’s even worse. It would be like one scientist saying it indicates rising temps, and arguing that’s why ice is melting, and the other arguing that it indicates falling temps and arguing that’s why ice is melting. I.e. that H2O has the property of melting when things get really cold.”

    This seems remenicent of Major Freedom’s TIPS spreads could indicate either higher or lower inflation expectations…

  7. Gravatar of dwb dwb
    25. June 2012 at 09:39

    i dont know what to make of Taylor. i still remember this:

    http://www.calculatedriskblog.com/2009/07/taylor-rule-debate.html

    and why i feel very schizophrenic when the idea of a virtual fed funds rate comes up.


    Back in May, using then current data, Professor Taylor argued his rule implied a fed funds rate of plus 0.5 percent. Now Dr. Taylor argues current data suggest a rate of negative 0.955 percent.

  8. Gravatar of John Becker John Becker
    25. June 2012 at 09:56

    Professor Sumner,

    I understand that one of the main reasons you push for more aggressive monetary policy is to get around the problem of nominal wages that are inflexible downwards. You agreed with me that in a depression, the primary problem is mis-adjusted prices and wages that make production unprofitable. If this is the case, why do mainstream economists, so ready to call everything a market failure and recommend the government jump in, never recommend that the government do anything besides create inflation to bring real wages down?

    Why don’t they attack the problem directly? Creating money with the intent of bringing down real wages relative to other prices has so many flaws as a means of reviving commerce. First, labor unions have economists too. It’s possible that you can’t fool enough people when they figure out prices are rising and start asking for higher wages. It’s also the case, although most mainstream economists won’t admit this, that inflating the money supply rewards certain businesses and individuals in a way that actual customer demand wouldn’t have. As a result, these businesses suffer when inflation stops.

    In short, why recommend such a short sighted policy with so many unintended and undesirable consequences? Every economist knows inflation can get out of control. Look around the world. They also know that it can destroy a market economy. Why not just do something like lower the minimum wage, pay government workers less, or any other way coercive or non-coercive way of bringing wages down so that more people can go to work?

  9. Gravatar of John Becker John Becker
    25. June 2012 at 09:58

    I know you’re going to say you just recommend monetary stability, but clearly you’re answer to the recession RIGHT NOW is more aggressive monetary easing. I’m asking why so many economists, not just monetary specialists like yourself, go that route instead of thinking of ways for the government to bring down wage rates relative to other prices?

  10. Gravatar of Alex Godofsky Alex Godofsky
    25. June 2012 at 10:00

    John Becker: because it’s basically impossible to get the kind of wage and price flexibility necessary to make money neutral. We saw monetary effects even during time periods with far less regulation and more wage and price flexibility than today.

  11. Gravatar of Orionorbit Orionorbit
    25. June 2012 at 10:10

    @john Becker
    Expansionary monetary policy has nothing, NOTHING, to do with fooling workers and exploit the money illusion, in fact the more transparent and clearly communicated mon policy is, the higher the likelihood that the fed will achieve its objectives in the smallest time frame possible. I don’t think Scott (or any monetary economist economist after Hume) has ever advocated anything like what you write. You also make tow elementary errors:

    - expansionary monetar policy has little to do with inflation. The monetary base has skyrocketed and this has not created inflation. When the economy recovers the fed can simply unwind its bond portfolio to counter any inflation risks. So no matter how many bonds the fed buys even if everything fails the worst case scenario is credit losses for the fed as it tries to sell bonds at higher yields, not inflation for the consumer.

    - the reason you should not pay public workers any less, is because that would lower aggregate demand and you can’t solve the problem of inadequate aggregate demand by increasing the savings of the government. Contractionary fiscal policy is contractionary.

  12. Gravatar of Luis Luis
    25. June 2012 at 10:16

    Scott, I find quite ridiculous the paranoïa with inflation in these times. If I remember Well, it Was in 2007 when te BIS recomended higher interest rates. Obviously, if you say always the same mantra, eventually you could get to be right.
    Higher rates today is madness. With a serious risk of fall of te euro and a contagion to all the world, it Will be better To think about how to save the sutnamy… Apart rising rates…

  13. Gravatar of John Becker John Becker
    25. June 2012 at 10:31

    Orionorbit,

    How the heck would you define an expansionary monetary policy besides saying that it will make prices higher than they would be otherwise? Right now the Fed targets inflation, if their objective is to produce more inflation, then it is simply crazy to say that a more expansive monetary policy in that scenario has NOTHING to do with inflation.

    Scott agreed with me that one of the main causes of a recession is that wages are too high relative to other prices. There’s no other answer for that problem to him other than keeping nominal GDP (nominal incomes) growing steadily so that wages never have to fall nominally. How else will unemployment go down as a result of monetary policy other than by reducing real wages?

    The money used to pay government workers comes from somewhere smart guy. This is easy to see in the case of taxes and borrowing but even in a case where the central bank wasn’t independent and just paid government workers by adding newly created money to their accounts, you’d still be transferring real resources from one place to another.

    It seems to me that you embrace a type of cartoon Keynesianism where any spending cuts automatically lead to recession. This view is based on a very clear misunderstanding of the role of savings and the heterogeneous nature of labor and capital. Economies aren’t just about total spending, what the money is spent on is important too.

  14. Gravatar of John Becker John Becker
    25. June 2012 at 10:38

    Alex Godofsky,

    Who says it’s impossible to get wages to go down. Governments these days have the power to do anything they damn well please. I’m not creative enough right now to think of a way for them to drive wages down in the private sector but just using non-coercive means they could lower the minimum wage and reduce government employee wages. I don’t know what kind of programs they could pass using coercion. Since economists recommend coercive interventions by the government all the time, often economically dubious ones, why not recommend an intervention that at least attempts to directly attack the problem?

  15. Gravatar of John Becker John Becker
    25. June 2012 at 10:41

    Orionorbit,

    This is the cartoon Keynesian test: Suppose the government is paying 1000 people $1,000,000 a year to dig and fill in a ditch in central Nebraska, would the economy suffer as a result of cutting that program?

    If you say yes, I’d recommend reading “Economics in One Lesson” by Henry Hazlitt. If you’re still not convinced it isn’t great to pay people vast sums of money to do useless things then I’m not sure anyone can help you.

  16. Gravatar of Doug M Doug M
    25. June 2012 at 10:52

    John Becker,

    I think the methods that the Government has to influence real wages beyond creation of inflation, will be tested in Europe. In the Eurozone no country has much influence over its money supply. Spain wants real wages to fall to make the country competitive; Germany thinks its the real wages are fine where they are. What can Spain do to improve its unemployment rate and increase competitiveness?

    It can cut wages of govenrment employees. It can cut pension benefits. And if an alrealy over-leveraged Spain experiences local deflation, what does this do to debts that would be growing in real terms? Germany needs inflation. Just try to sell that one to the Germans.

  17. Gravatar of Major_Freedom Major_Freedom
    25. June 2012 at 11:00

    That’s not clear to me; indeed NGDP growth wasn’t unusually high during the 2000s.

    A portion of the monetary inflation was “exported” to other nations, thus keeping a lid on NGDP growth here. The effect on economic calculation is still there however, because of the corresponding non-market interest rates and volume of credit.

    And I freely acknowledge that I’m in the minority here, so that if there is a crackpot it’s probably me.

    If you’re a crackpot, then you’re followers will consider me certifiable, haha.

    Here’s where I think Taylor went wrong. He has money being very accommodative in 2003, 2004, 2005, 2008, 2009, 2010, 2011, 2012. OK, then tell me how all this accommodative policy brought us the slowest NGDP growth since the early 1930s?

    Given sums of monetary inflation are having less and less of an “effect” on being able to sustain the increasingly distorted economic structure, that is itself caused by the Fed putting downward pressure of its own on interest rates.

    If you define money looseness and tightness according to NGDP, then even high rates of money printing won’t be “accommodative” if NGDP doesn’t rise by whatever rate is (I argue arbitrarily) chosen as the baseline.

    ——

    You seem to want people to say money is tight, while others want people to say money is loose. The reason economists can’t agree is because nobody has access to the information borne out of the system of profit and loss when it comes to money production itself.

    Ask yourself whether or not something like car production is “tight” or “loose”. The way to know this is of course by looking at the profitability of car manufacturing. If the car industry is incurring losses, then we can say they’re overproducing cars. If the car industry is earning abnormally high profits, then we can say they’re underproducing cars. This is how we know relative overproductivity and relative underproductivity in cars, shoes, shirts, computers, office equipment, hamburgers, and everything else.

    It’s also the only way to know the extent of relative under- and over-production of money.

    Market monetarists, Monetarists, and Keynesians, are having the exact same problem the old Soviet commissaries and central planners had when deciding what to produce and where in the USSR. They too did not have access to a local system of profit and loss (but they could tailgate off the world market prices to make their plans SOMEWHAT rational).

    With world central banks, money production is completely in the dark. There is no other Earth to look at to see a system of profit and loss in money production to see if subjective planning central bankers are producing too much or too little. The world’s central bankers, despite their education, despite their credentials, are completely, utterly, totally and unequivocally unable to KNOW how much money there should be in the world’s markets. No central planner can know. Not you, not me, not Friedman, not Krugman, nobody on this blog, not the majority, not Bernanke, not Taylor, not any economic actor who is necessarily ignorant of the composition of the economic preferences in the market. THAT is why economists will NEVER agree on how much fiat money is “proper”, nor how much is “too much”, nor how much is “too little.” They can’t agree the same way the Soviet central planners could not agree, which is why there had to be a dictator there to make a final decision, to settle the squabbling.

    And that is where central banking MUST lead if it continues. One world central bank, one world money printing dictator, one subjective belief to overrule all others by force. This money dictator will also be in the dark, because he too would necessarily act in a system not according to profit and loss, but his own whims (which can be “informed” by the world’s top economists, it doesn’t matter).

    Inflationist economists are like a bunch of blind as a bat central planners who each have their own subjective standard for what constitutes money tightness and looseness, but not knowing such on any basis of economic calculation.

    I mean seriously, the fact that you are lead to believe that a perfect, single, clean and constant 5% NGDP rate, doesn’t that set alarm bells in your head? Imagine some crazy communist from middle age Germany who said the perfect society is one where there are no more and no fewer than 10,000 people per city (yes, that is really what happened). Wouldn’t such a clean, even, perfect number be cause for suspecting the person has some screws loose? That he’s not with all his marbles?

    Now consider 5% NGDP. It’s the same craziness! Who in their right mind would believe themselves intellectually capable of discerning via Providence that “5% NGDPLT” is what spending should be? Are you not lead to such a clean perfect number, for the precise reason that you have no solid foundation for the whole NGDP targeting program in the first place?

    Does anyone say there should be 5% more cars produced each year every year? Does anyone say that there should be 5% more dental visits each year every year? Anyone who did claim that would be rightly considered a mentally disturbed individual. But we don’t see people saying that. Why? Because nobody is compelled to say it, since we can look to the system of profit and loss in car making and dentistry!

    If car making and dentistry did become monopolized by the state, then you can be sure that there will arise “market automative specialists” who propose crazy things like “5% growth in car making each year every year”, and “5% growth in dental cavities filled each year every year!”

    Or, you can shut the busybodies up, and integrate money production into the market process, and we can point to the profit and loss of various money producers, and THEN have an informed judgment on whether or not they invested too much or too little in money production, and we’d be saved from this 5% NGDP targeting lunacy.

  18. Gravatar of John John
    25. June 2012 at 11:03

    Doug M.,

    Spain and Greece clearly are not countries that buy into capitalism. I don’t know the details of their regulatory structures but I know a little about Greece. Pension ages are very low, government workers are paid extremely well, government jobs get awarded based on political loyalty and often the people hired don’t have to show up to work. My favorite story is about the man who tried to open up an online business selling olive oil and had to provide the government with a stool sample.

    http://moonbattery.com/?p=8594

    There was also the story on CNBC about the lady who had to wait 3 years to open a book store and another 2 years to serve coffee there. Greece hasn’t issued a new trucking permit in over 20 years. If stuff like that doesn’t kill jobs, I don’t know what would.

    The bigger point I’m trying to leave you with is that there are a lot of things besides macro stuff that can seriously weaken an economy. Why pursue a policy of inflation instead of addressing stuff like this? It seems to me that granting people trucking permits or licenses to drive a cab would have fewer bad side effects than printing money.

  19. Gravatar of John John
    25. June 2012 at 11:07

    MF,

    Can I change my screen name on here to Master Sergeant Liberty or Colonel Individual Sovereignty?

  20. Gravatar of Steve Steve
    25. June 2012 at 11:17

    @ John Becker,

    The government legislate a reduction of private sector wages, but it would be spectacularly unpopular. Plus, you’d have to legislate private sector debt haircuts, too, which would be spectacularly unpopular with the rich guys who like wage reductions. The question is what can you do that BOTH would work AND would be democratically possible. The better alternative is NGDP growth. That’s “MoneyIllusion” for you.

  21. Gravatar of johnleemk johnleemk
    25. June 2012 at 11:26

    John Becker,

    Tell me which is more economically disastrous — 4% inflation, or wage and price controls?

  22. Gravatar of ReturnFreeRisk ReturnFreeRisk
    25. June 2012 at 11:27

    I would love to see a simulated history of NGDP targeting rule prescriptions for Fed policy. Specifically, what would it say the optimal policy would have been in 2003-5 and why? As a leading advocate of NGDP targeting, could you please provide at least an actual rule?

  23. Gravatar of John John
    25. June 2012 at 11:27

    Steve,

    I get the part about the money illusion, even though others on this comment thread denied that’s why higher NGDP would reduce unemployment. The problem is that most (good) economists would agree that higher inflation has undesirable side effects. Plus, there’s no guarantee that it would work if people are able to see past “the money illusion.” On the other hand, what is the downside to dropping the minimum wage? That would create more hiring and improve the economy as a whole. Even if people don’t agree that dropping the minimum wage is desirable, I think they can admit that it has less potential downside than inflation.

    Bottome line: I just want Scott to admit that he and the other economists push inflation as a cure to recessions for political rather than economic reasons.

  24. Gravatar of ssumner ssumner
    25. June 2012 at 11:29

    Adam, Yglesias was too kind to Stiglitz.

    Neal, Perhaps, physics is another field I know little about.

    Patrick, Good question.

    DonG, When she succeeds, I’d like one. BTW, the Newtonian physics example is an excellent metaphor.

    dwb, I’m not sure either.

    Talldave, I agree, although the best solution is to completely ignore inflation.

    “NGDP growth 2003-2006 — I see 6+%. Wouldn’t this be considered “easy” by the market monitarist’s definition?”

    Yes, David Beckworth has made that argument, and it’s defensible. But NGDP was below trend in 2003, so that’s not all that fast from a “level targeting” perspective. In contrast, NGDP rose at an 11% rate in the first 18 months of the 1983-84 recovery. So 6% is not all that fast for a recovery period, when the long run average of 5% includes recesssion years.

    But even if you make that argument, it’s the least “excessive” monetary stimulus of any expansion during my lifetime, so it begs the question of why we had the huge collapse after 2007. It wasn’t because NGDP was wildly overheated, just slightly.

    I’m fine with forward-looking indicators, but that also suggests money is too tight, because the Fed expects to undershoot on both inflation and employment.

    John Becker, You said;

    “If this is the case, why do mainstream economists, so ready to call everything a market failure and recommend the government jump in, never recommend that the government do anything besides create inflation to bring real wages down?”

    I presume you are referring to me. If so, you are wrong for all sorts of reasons:

    1. I don’t want any more government involvement in the economy, I want less. I even want the Fed to be less involved. I want a different policy that is less interventionist from the Fed. No more buying of dodgy assets, just regular T-bonds.

    2. I don’t favor higher inflation, I favor faster NGDP growth right now. And in the 57 years I’ve been alive I’ve only favored more NGDP in 4 years. There were far more cases of me calling for tighter money, indeed I thought money was too easy from the later 1960s into the 1980s EVERY SINGLE YEAR.

    So I don’t know which economists you are talking about that always think inflation can fix problems, but I’ve never met them.

    Why not bring down wage rates? Because it’s easier to paint a house by moving the brush back and forth, than by holding the brush fixed and moving the house back and forth. The Fed’s going to do monetary policy whether we want them to do it or not (I don’t.) If they are going to do it, why not call for a policy that leads to a more stable economy, rather than a less stable economy?

    Luis, I don’t get that worry either.

  25. Gravatar of DonG DonG
    25. June 2012 at 11:30

    JohnB, You are confusing fiscal policy with monetary policy in some posts. In others, you argue with the assumption that zero inflation is always better than non-zero inflation. Here’s something from Bank of Canada website:
    Why not zero inflation?
    Why does the Bank aim for a moderate amount of
    inflation rather than no inflation? The reasons usually
    given for not targeting an inflation rate closer to zero
    focus on three issues: (i) problems caused by the
    constraint that interest rates cannot fall below zero;
    (ii) difficulties in measuring inflation accurately; and
    (iii) downward wage rigidities that could affect labour
    market adjustment.

    Central banks that use 2% inflation targeting have a strategy that is functional during all stages of typical business cycle. The reason NGDPLT is better, is that it works
    for typical and atypical business cycles. It also has
    a faster reaction function and a more accurate metric.

  26. Gravatar of Steve Steve
    25. June 2012 at 11:39

    Scott, lots to say here, hoping you have thoughts:

    Item 1:

    Some people might argue that the STEEPNESS (adjusted for liquidity preference near the zero bound???) of the yield curve indicates the CURRENT STANCE of monetary policy, whereas the LEVEL of medium term interest rates indicates the PAST stance of monetary policy.

    Item 2:

    I saw an interesting statistic, that corporations in aggregate are holding 11% of total assets in cash, versus 5% as the long run historical average. It isn’t just the “public” that is hoarding base money, it’s savvy businesses, too.

    Item 3:

    The thing I find most troubling about John Taylor is the obsession with popping bubbles in “some emerging economies” at the expense of crushing major developed economies.

    There’s always going to be an unsustainable boom somewhere, especially in a globalized, specialized, free trading world, prone to asymmetric shocks. We’ve already seen three boom-bust cycles in oil in five years for example. I think economists need to think long and hard about how to manage that without blaming it on monetary policy as the BIS and Taylor are wont to do.

    I would *love* to hear your thoughts on this point as I believe it’s a major factor in economic volatility, reserve currency hoarding, and potentially trade protectionism. (Actually, I’d argue that Germany has been using the Euro as an indirect form of trade protectionism — to make someone else bear the burden of asymmetric shocks.)

    Item 4:

    “Isn’t number one damn close to “low temps cause water to melt.””

    I would argue that Taylor thinks the Fed is using a blowtorch to make ice cubes. ;)

  27. Gravatar of Major_Freedom Major_Freedom
    25. June 2012 at 11:42

    Why has headline CPI inflation averaged 1.1% since July 2008?

    One major reason is that the CPI in 2008 is not calculated the same way as it was in the 1930s.

    If the same methodology was used now as was used in 1980 (not the same basket of course, but the same inflation calculation methodology), then CPI inflation today would be around 9%, not 1.1%.

    It would also have hit low double digits in mid-2008 just before the collapse, rather than just over 5%.

    RGDP is substantially lower today than is inferred from % NGDP – % CPI.

    I argue the US economy is not growing in real terms. Inflation is no longer a drug any more. It’s now a cancer.

    To go back to my temperature analogy, I’m claiming that NGDP and the CPI are the melting ice. We can disagree about whether a rising bar of mercury means that temps are rising or falling, but surely we can all agree that melting icecaps show it’s getting warmer.

    Too bad you can’t look to market based analogies like profit and loss, and too bad you have to invoke analogies to nature, the same way the communist planners did during the 20th century because they too did not have a market for the means of production in the economics concerned.

    And we can disagree about whether ultra-low interest rates and a bloated monetary base indicate easy or tight money, but surely we can all agree that ultra-slow NGDP and CPI growth are signs of tight money?

    If we disagree about whether ultra-low interest rates and a bloated monetary base indicate easy money or tight money, then that will determine whether or not we agree that ultra slow NGDP and CPI growth are signs of tight money. Namely, we’d have to disagree.

    So how did Bernanke (in 2003), Friedman, and I end up in the minority? (So much so that even Bernanke’s jumped ship, calling current Fed policy accommodative even though his 2003 criteria suggests it’s ultra-tight.)

    The fact that the majority of people are satisfied with the current inflation, and would be upset with more?

    Do you really want food price riots in this country like there was 2007-2008 around the world?

    Monetary economics is a very strange field. As long as things are fairly normal (as during the Great Moderation) economists of wildly differing stripes see things in roughly the same way. Day-to-day adjustments in monetary policy are done via the liquidity effect, which means an unexpected rise in the Fed’s target rate really is contractionary, relative to the alternative. In addition, velocity is reasonably stable, so countries with higher trend inflation tend to have higher trend rates of growth in the money supply. Both Keynesianism and old-style monetarism have some validity—both the interest rate and the money supply seem at least slightly informative.

    A temporal rise or fall in the fed funds rate does not necessarily signal above or below market money production. A temporal rise in the fed funds rate could mean loosening money, if the loosening is not as much as it would have been to generate an even higher fed funds rate. Similarly, a temporal fall in the fed funds rate could mean tightening money, if the tightening is not as much as it would have been to generate an even lower fed funds rate.

    I’ve never studied topology, but I wonder if there isn’t an analogy here for the saddle point surface. The Great Moderation is like the sweet spot where things are locally flat, and Cartesian in all four directions. But when you move away from that point then both money supply and interest rate indicators become hopelessly unreliable. And monetary policy breaks down. The high inflation breakdown is less complete, because the money supply indicator still works somewhat.

    The reason why money supply and interest rate indicators become hopelessly unreliable with high inflation, is the same exact reason why they become less reliable with any inflation whatsoever, relative to an unhampered price system of private property and profit and loss.

    The “reliable” interest rates during the 2000s nevertheless blew up a housing bubble. Maybe the sensitivity of interest rates on economic stability is more pronounced even during “normal times” than you give it credit for?

  28. Gravatar of Orionorbit Orionorbit
    25. June 2012 at 11:48

    John, you are confusing cause and effect. If the fed targets the output gap credibly then you might get inflation for instance due to persistent cost push shocks, but even such unlikely inflation is a byproduct of successful mon policy, not the other way around. You are fear from agreement with Scott on this as far as I can tell.

    Regarding your question, if the govt had a program where workers would be doing something counterproductive, such as digging holes in the sand and fill them back in, or producing loads of ammunition and ship them to the uk for free, it would be a bad idea mon policy wise to cease such programs if the economy was producing output bellow its potential and a good idea to cease them if the economy was producing above potential. This is an economic argument however and there might still be reasons to not cease such programs under any circumstances, for instance if these workers really needed some income or the uk really needed that ammo.

    Furthermore you seem to assume I am for Keynesian policies. Not true. I am for evidence based social science, ie the kind of science that makes the economy run more efficiently/makes orionorbit make loads of money on the trading floor. Keynes and Friedman have contributed most of what we know to this evidence based social science but I don’t follow any kind of Keynesian/monetarist dogma. Unfortunately a very inconvenient iPad keyboard keeps me from giving you a more documented answer, I hope this suffices.

  29. Gravatar of Major_Freedom Major_Freedom
    25. June 2012 at 11:51

    Who will produce the out-of-the-box thinking required for our modern crisis?

    This much is clear: Keeping everything monetary in place, and only changing the central bank’s strategy from price and employment stability, to NGDP targeting, is not “out-of-the-box.” It’s in the same socialist box, only with a different….let’s call it “aroma.”

    If you want “out-of-the-box” thinking, then consider free enterprise in money production. Consider money production becoming integrated into the system of private profit and loss.

    Neither Keynesians, nor old style Monetarists, nor market monetarists, are proposing that truly revolutionary system.

    Market monetarism is subject to the same flaws as old style monetarism: The impossibility of economic calculation in a socialist setting.

    Unless and until money production becomes completely decentralized and open to market competition, there will ALWAYS arise “monetary problems” in the social discourse and in the body politic, which leads to multi-billion dollar research programs financed by the central planners who are hoping to find economists who can teach them how to maintain their socialist control without causing a public revolt.

    It’s interesting to watch some economists even VOLUNTEERING for such a “prestigious” role: How to maintain the central planner’s control and exploitation over others, without causing a public revolt.

    It’s rather remarkable for me to grasp that I live in a world among academics who actually think like this. Maybe I am hopelessly naive, and have the whole “academia” thing wrong. I used to think academia was the way to reduce the power of central planners, to challenge the intellectual foundation of violence backed control, to increase individual freedom and prosperity. But a bunch of years ago I learned the cruel lesson that most academics during my time on this Earth are either intellectual cowards, smarmy opportunists, hopelessly ignorant, or all of the above.

    —–

    If you want to know what Friedman, Keynes, and Schwartz really thought, but were either too afraid to say it aloud or didn’t think they could gain by it, or maybe they just didn’t even know it at the time, then a handy rule of thumb is to look at the convictions they communicate near their deaths.

    Milton Friedman:

    “Any system which gives so much power and so much discretion to a few men, [so] that mistakes – excusable or not – can have such far reaching effects, is a bad system. It is a bad system to believers in freedom just because it gives a few men such power without any effective check by the body politic – this is the key political argument against an independent central bank…To paraphrase Clemenceau, money is much too serious a matter to be left to the central bankers.” – Friedman, 4 years before his death.

    “You must understand that the fundamental problem is you shouldn’t have an institution which depends on whether he’s good or not. My first preference would be to abolish the Federal Reserve. Stop the growth of government. Bring government down and make it smaller.” – Friedman, 6 months before his death.

    J.M. Keynes:

    “I find myself more and more relying for a solution of our problems on the invisible hand which I tried to eject from economic thinking twenty years ago.” – Keynes, 10 days before his death.

    Anna Schwartz:

    “The Fed was accommodative too long from 2001 on and was slow to tighten monetary policy, delaying tightening until June 2004 and then ending the monthly 25- basis-points increase in August 2006. The rate cuts that began on August 10, 2007, and escalated in anunprecedented 75- basis points reduction on January 22, 2008, were announced at an unscheduled video conference meeting a week before a scheduled FOMC meeting. The rate increases in 2007 were too little and ended too soon. This was the monetary policy setting for the housing price boom.” – 2009, 3 years before her death.

  30. Gravatar of Major_Freedom Major_Freedom
    25. June 2012 at 11:53

    John:

    Can I change my screen name on here to Master Sergeant Liberty or Colonel Individual Sovereignty?

    You don’t have to ask for my permission to do that.

    I recommend “Admiral Anarchist.”

  31. Gravatar of John John
    25. June 2012 at 11:55

    Scott,

    I respectfully thought you were being a little disingenuous there. First of all I wasn’t referring specifically to you, Paul Krugman is the most notable example of someone who never calls for repealing a single regulation but always wants more inflation or government spending. I’m referring to all of the macro guys though. I’ve heard nearly all of them argue for more inflation right now or higher NGDP but I’ve never once heard one of them call for repealing the minimum wage.

    I don’t think dropping the minimum wage is like moving a house around a paint brush. A policy like that would actually help while the benefits of inflation or higher NGDP are very debatable.

    My point is this: how come there are not even the most basic ideas tossed out to bring down wages? Why is the problem indirectly attacked from the side of manipulating money instead of confronted head on? The government can do radical things to interfere with the economy, how come they don’t interfere in a way that would actually help?

  32. Gravatar of ReturnFreeRisk ReturnFreeRisk
    25. June 2012 at 11:58

    Scott said:
    “NGDP growth 2003-2006 — I see 6+%. Wouldn’t this be
    considered “easy” by the market monitarist’s definition?”

    Yes, David Beckworth has made that argument, and it’s defensible. But NGDP was below trend in 2003, so that’s not all that fast from a “level targeting” perspective.

    I can not come up with any reasonable scenario where NGDP was below trend in 2003. What period would you start with as a “normal?” I would argue that 1995-96 was normal where unemp was low and core inflation close to 2%. THen build a 5% or slightly higher nominal GDP growth on that. that is the long term average since 1985. If you build it with 2% inflation target plus 3% long term potential growth in US economy, you end up around 5% as well. How will you get 2003 below trend?
    If I assume a higher growth in NGDP, then the actual is always below this potential – implying the Fed has been too tight since 1985. And by a lot. I just do not understand how the actual rule would be built?

  33. Gravatar of Alex Godofsky Alex Godofsky
    25. June 2012 at 12:05

    John Becker

    Who says it’s impossible to get wages to go down. Governments these days have the power to do anything they damn well please. I’m not creative enough right now to think of a way for them to drive wages down in the private sector but just using non-coercive means they could lower the minimum wage and reduce government employee wages. I don’t know what kind of programs they could pass using coercion. Since economists recommend coercive interventions by the government all the time, often economically dubious ones, why not recommend an intervention that at least attempts to directly attack the problem?

    We do. It’s called NGDP level targeting.

  34. Gravatar of John John
    25. June 2012 at 12:16

    johnleemk,

    Of course I think wage and price controls would be more harmful. If an economists advocated wage controls alone I think they might be able to make an interesting case. We see state and local goverments fighting to bring wages down today and also controlling pensions. I think the best strategy would be to keep inflation low and relax any laws that might prevent wage adjustments like the minimum wage.

    Don G,

    Where am I confusing fiscal and monetary policy? Monetary policy has to do with money and fiscal policy has to do with spending decisions approved by Congress. They can overlap when the central bank losses its independence and monetizes the debt.

    Also, I’m addressing (iii) with these comments. I do not think that inflation, even moderate inflation, is the best way to deal with nominal rigidities.

    Orionorbit,

    Cost-push shocks aren’t a real thing. Inflation has to do with increased in the supply of money and/or spending. Saying that increasing costs drive prices higher is just saying that prices rise because prices rise.

    You said: “it would be a bad idea mon policy wise to cease such programs if the economy was producing output bellow its potential and a good idea to cease them if the economy was producing above potential.”

    I really don’t mean to sound condescending but have you ever heard of opportunity costs? An economy that spends a bunch of money to pay people to do useless things is producing below potential by definition since those people are adding zero value to the economy. Regardless of the state of unemployment, the economy would be better off if they were all fired and even one of them found a job producing something useful. The purchasing power spent paying them to work was taken either from taxpayers, lenders, or people holding dollars (through inflation). Economics involves trade-offs and you can’t understand it simply through an aggregate demand framework.

    Unfortunately, evidence based social science is an impossibility. You can’t run any experiments and there are too many causal variables at work in the real world. That’s why you can see the same graph or piece of data used to justify multiple conflicting worldviews. I firmly believe that the most “scientific” way to approach social sciences is through deduction and reasoning. For instance, doing thought experiments that hold everything equal. If you want to attack an economic argument, you really have to attack reasoning since data can be interpreted so many different ways.

    If you wanna make money on the trading floor, buy stocks trading below book value. Or check out the “Dogs of the Dow” strategy. To the eternal chagrin of people like Scott who believe that markets are totally efficient, these strategies consistently outperform over long periods of time. Read the criticisms of EMH here.

    http://en.wikipedia.org/wiki/Efficient-market_hypothesis#Criticism_and_behavioral_finance

  35. Gravatar of Lorenzo from Downunder Lorenzo from Downunder
    25. June 2012 at 12:20

    It is a revealing exercise, trying to explain to an intelligent layperson why cutting interest rates are a signal for monetary easy BUT low interest rates are a sign of tight money:
    http://skepticlawyer.com.au/2012/06/06/easy-guide-to-monetary-policy/#comment-139887

  36. Gravatar of Lorenzo from Downunder Lorenzo from Downunder
    25. June 2012 at 12:20

    that should be “monetary easing”.

  37. Gravatar of Orionorbit Orionorbit
    25. June 2012 at 12:39

    John, you are wrong on Paul Krugman, for instance he argued against fiscal stimulus in the case of Japan (to be exact he said it would be ineffective in pulling the country out of the liquidity trap) and he was also against bush era stimulus.

    I think you fail to realize that the present problem the economy is facing is that there is a lot of excess capacity that could be producing useful stuff but it sits idly around. If you see what businesses are saying you’ll see they all admit that much, for instance there’s plenty of trucks that don’t transport stuff, plenty of factories whose machine sits idle, plenty of computers that do not yield ones and zeroes and so on. The monetarist view is that the reason this capital sits idle is that there is not sufficient money/credit to pay them. If there was, some businessman would start using this idle capital to make stuff that YOU would want to buy, hence the solution is for the fed to start creating money/credit so that businessmen can borrow it and have these machines produce something. Now, the problem is slightly more complicated as businessmen tend to dislike uncertainty and they want to be sure that the fed will always produce enough credit, which is why one off monetary injections do not work; we need the fed to commit to always providing enough credit, otherwise they will not undertake any long term projects, but you get the picture.

    Of course, if the fed keeps producing money/credit even after all these machines are put to work, we will get inflation, but the fed is not stupid and will stop producing money or even destroy money if it finds itself in a situation where the economy is producing at or slightly bellow capacity, which brings me to my previous argument: if the fed employs proper monetarist principles we can only have inflation due to factors beyond anyone’s control (for instance if the supply of oil is limited due to war). Scott had an excellent post on this entitled something like “when monetary policy works only RBC models are left standing”, I suggest you look it up.

  38. Gravatar of Neal Neal
    25. June 2012 at 12:39

    Scott, when are you going to write a textbook? Also, if you want a graphical illustration of the physics analogy, or more explicitly of the economic point (that monetarists and Keynesians are correct in ordinary times, monetarists are correct when inflation and rates are high, and neither is correct when inflation are rates are low), I can probably throw one together for you.

  39. Gravatar of John John
    25. June 2012 at 13:09

    Orionorbit,

    Paul Krugman always argues for more spending from the government. He has always maintained the the U.S. and Japan has simply failed to spend enough. He was against the Bush era stimulus because it was enacted by a Republican administration and it involved tax cuts instead of government spending. I challenge you to find a case of him accusing Obama or any other Democrat of wasteful spending.

    I realize perfectly well that there is a lot of unused capacity in the U.S. but I disagree that more AD is the perfect cure. Like Scott, I believe that recessions/depressions come from misadjusted prices that make production unprofitable. Prices have not adjusted correctly and therefore it is difficult to produce the items consumers want without losing money. The best example of this is wages being high relative to the amount of capital available for businesses to pay workers with.

    The economic philosophy you are espousing would be well labeled as consumptionism. It seems like you view the economic problem as simply getting people to consume enough stuff. The real problem an economy faces is figuring out how to PRODUCE the right products in the right amounts. That’s why entrepreneurship and market-based prices are so important. If you look around the world you will see that the nations that are able to consume the most, like the United States, are also the nations that produce the most (production doesn’t always mean physical goods).

    It seems to me that you also have a misunderstanding of inflation. One price rising in the economy, the classic example is oil, does not cause all prices in the economy to rise unless the supply of money in circulation increases as well. If money doesn’t increase, the extra money people have to spend on oil doesn’t get spent on other items driving their prices down other things being equal.

    Just out of curiousity, where did you learn econ from? It is very old school Keynesian. I’m not saying that’s a bad thing; it’s just interesting to me because I thought these arguments went out of style so to speak. I like how the economic thought you’re putting forward involves no trade-offs or opportunity costs at all. You strictly focus on what you can see right in front of you but I’m trying to put out the stuff that remains unseen to paraphrase Frederic Bastiat.

    By the way, trust me that you can have inflation with unused capacity. Scott would say that it depends on the SRAS/LRAS curve how much inflation vs. real growth you get from monetary policy. In any case, I thought stagflation discredited the idea that you can’t get high inflation with excess capacity. I guess some ideas die hard.

  40. Gravatar of Counterparties: Central banks warn about central banks | Felix Salmon Counterparties: Central banks warn about central banks | Felix Salmon
    25. June 2012 at 13:15

    [...] wouldn’t be wrong to think that sounds a lot like Bernanke’s polite nudging of Congress over the last few years. To Matt Yglesias, the BIS report sounds like a series of [...]

  41. Gravatar of Mathieu Dufresne Mathieu Dufresne
    25. June 2012 at 13:23

    “Who will produce the out-of-the-box thinking required for our modern crisis?”

    The best answer to that question is Steve Keen and you should really take the time to understand his dynamic modelling. He provides the out of the box thinking required to understand the current crisis and I’m now convinced his modelling technique will eventually replace conventional macro tools. I think Keen comes up with a deeper understanding of the dynamics involved and that’s basically why he could see it coming in the first place. The problem is, if you can’t prevent a runway in debt to GDP ratio, you can’t prevent a depression to occur. It may seem that nGDP targeting can adress the issue since higher inflation can reduce the debt burden, but the problem is, rising expectations about the future will also have an impact on the change in debt. In fact, I think that the main transmission mechanism of nGDP targeting (and monetary policy in general) is the change in debt and most economists are missing that because the relation beween the level of debt, the change in debt and it’s acceleration isn’t straightforward and require differential calculus in order to analyse properly. The change in velocity seems to be mostly the manifestation of the dynamics of debt rather than a change in the turnover rate of the accounts to make an analogy with Keen’s model. From that arise a serious problem, by preventing a downturn using monetary policy, you allow the debt to GDP ratio to take off again. That’s what happened when the FED prevented serious downturns to occur during the last 2 or 3 decades, in short to medium term, it does stabilizes the economy, but in doing so, it will help cause a bigger crisis in the future. If you don’t control debt to GDP ratio, you will ultimately reach a point where you won’t be able to overturn the situation. In short, preventing a depression using monetary policy is like trading volatility now for volatility in the future plus interest. I think that’s the kind of feedback effects you can’t capture using conventional macro tools.

    If you take the time to understand his modelling and his theory, you will see that accommodative monetary policy can lead to low nGDP growth when the change in debt starts decelerating. Here’s two presentations by Keen which summarize his work :

    http://www.debtdeflation.com/blogs/2012/06/17/fields-institute-presentation-series-video-1/

    http://www.debtdeflation.com/blogs/2012/06/24/fields-institute-presentation-series-video-2/

  42. Gravatar of Orionorbit Orionorbit
    25. June 2012 at 13:23

    John b, we also have a big miss understanding on what social science means. Of course i am not so naive as to think that I will look at the evidence and come up with an equation that predicts how the economy will behave, because certain things are unpredictable and also the “evidence” is partially a result of the structure the economy has. If that structure were to change, we would not have observed this evidence. Evidence based social science works by ruling out certain explanations by looking at the evidence. For instance if the economy is in trouble an explanation could be that workers have the wrong skills, therefore we need to fire them and retrain them. However, if that were indeed the case we would be observing a huge rise in the income of these few workers that have the proper skills as businesses compete over their talents. Given that no such rise in specific workers’ income can be observed we must think of a different explanation. If for instance I propose the explanation that the economy is in trouble because businesses cannot pay their workers due to insufficient access to loans, it would be much harded to refute my hypothesis by looking at the evidence. Of course my explanation is far from an everlasting truth but as long as we have confidently ruled out everything else, it constitutes sufficient basis for informed, evidence based, judgement and consequently action (as Henrik Jensen at CPH uni would put it).

    Furthermore, solid intuitive economic thinking, rigorous math and tireless examination of the evidence are not substitutes, but complements. I do not support replacing economic thinking with mathematical equations, all I am saying is that we need all three because that’s the only way known to man through which our inherent predispositions in favor of one world view over another can be overcome. Scott rarely uses math in his models but this doesn’t make them any less scientific. If your economic thinking is correct, thought experiments, math and evidence will all tell you the same thing.

    Finally, given my track record in the finance industry, please trust me when I say that I hardly think I need any advice on how to make money. Dogs of the Dow is a strategy that often works but there are very good reasons it does so, I.e. that these stocks come with non linear risks, hence they MUST pay more otherwise people would simply not buy them. Look up Fama/French ’92 articles for more on this one. And I’m not even a big fan of efficient markets (have often disagreed with Scott on this one), but in this case assuming market efficiency will likely save you from risks you don’t want to be assuming, so pardon my rudeness and take my advice on this one, even if you discard all my comments on evidence based social science and monetary policy.

  43. Gravatar of Morgan Warstler Morgan Warstler
    25. June 2012 at 13:48

    Morgan Warstler +1

    Titan Airless Sprayer 0

    2500 sq ft (more then half) on day one.

    My father is a real estate developer / home builder, so growing up I spent lots of time on job sites swearing I would never enjoy doing this stuff.

    What an idiot I was. Although, it is easy to see where engineering for simpletons and new building materials drive down the value of labor, even as entertainment / hobby this trades craft stuff might have a future.

    My best friend here in Austin has a great idea for a 3 months Summer Trades Camp where your parents get rid of their teenagers for free, and in return the kids get to learn how to actually do stuff with their hands…. and worst case scenario learn a backup career in case the MFA in Poetry doesn’t work out.

    I suspect in five years, it’ll be all the rage.

  44. Gravatar of John Becker John Becker
    25. June 2012 at 14:00

    Orionorbit,

    I agree that theory and evidence should always point in the same direction. I just think you have to go from theory to evidence and not the other way around. Anytime you’re looking at data in the social sciences, you are automatically looking at the data through a theoretical lens just to figure out what data is relevant or not. So you can’t really discover a theory from the evidence.

    I’m not personally invested in the Dogs of the Dow, but if there are good reasons why the theory works, why did you seem to be saying to avoid it?

  45. Gravatar of John Becker John Becker
    25. June 2012 at 14:05

    Lorenzo from Down Under,

    Here’s a metaphor for that: you need to put the car into first gear to accelerate but if you have to stay in first gear for a long time it could mean that your car is stuck in the mud (the mud being depression)

  46. Gravatar of Yichuan Wang Yichuan Wang
    25. June 2012 at 14:17

    Scott, if it’s any consolation, the concept of a Taylor Rule never really made sense to me. It smells of too much “where is the rudder” and not enough “where is the economy going?”

  47. Gravatar of Greg Ransom Greg Ransom
    25. June 2012 at 14:32

    Scott, compare apple to apples, not apples to hula hoops.

    Economics attempts to provide causal mechanisms to explain essentially complex phenomena, just as science does in Darwinian biology & global brain theory.

    Economics does NOT attempt to provide simple 2 or 3 variable law and simple numerical constants like sophomore textbook physics (which neglects non-linear physics, e.g. addresses only 2 body Newtonian physics and pretends that the 3 body problem does not exist).

    If you have a bogus model of ‘science’ and ‘economic science’ based upon a perverse exemplar, ie baby physics as taught to 10 graders and a picture of science as ‘testing’ taught to 2 graders, don’t be surprised that your “economic science” comes out a botch, cake bake after cake bake.

  48. Gravatar of jt jt
    25. June 2012 at 15:26

    “how all this accommodative policy brought us the slowest NGDP growth …”

    Wouldn’t loose policy result in speculation which while having no effect on the real economy results in unserviceable debts, (Buyers of NASDAQ on margin, or home “flippers”!), followed by a balance sheet recession?

  49. Gravatar of Orionorbit Orionorbit
    25. June 2012 at 16:21

    John, the strategy works because stocks like the dogs of the Dow are riskier than the market, hence it’s perfectly normal that these stocks yield better return than the market. This superior performance, at least according to Fama/French is because they are riskier than the market and even though I am not their biggest fan I certainly buy into that argument. Oh and btw I do own some of these risky stocks in the context of a broadly diversified long horizon savings portfolio, but I am aware of the risk that for instance Cisco is far more likely to file for bankruptcy than the median Dow company. The reason I don’t get too involved in trading these companies is that there’s plenty of people who know these companies better than I do, so I leave it to them to “decide” on what their proper earnings multiple is. I prefer to stick to strategies that I can implement slightly better/faster than the rest of the market, such as volatility trading on the euro/Swedish krona exchange rate and even these skills took me years of studying and trading professionally to build up, so I find it highly unlikely that a private investor would perform better than buying and holding an index fund, unless de to luck. As I said in my old discussions with Scott, I am not a priest of the efficient markets religion but I occasionally do go to church and I additionally strongly recommend to retail investors such as yourself to follow the preaching of the efficient markets clergy as if it were the word of God, because even if ultimately inaccurate as a description of the world, it contains all you need to know in order to make money in the markets as a retail investor. Keep n mind that market efficiency is a theory that held up really well for many many years and it took huge effort from people like Shleifer and Summers who are way smarter than you and me to come up with a better description of how markets work and that better description comes at the cost of much higher complexity.

    Additionally many of your facts about Greece are wrong, for instance retirement age is one month later than in Germany and something like six years later than France. You are right on silly laws such as the limit on trucking licenses but these are a relic of an era where the government wanted to prevent people on the left from aiming financial influence and most people want them scrapped. They are certainly not indicative of Greeks’ attitude on capitalism and given the number of Greeks that have managed to succeed financially in countries like the US or Sweden I don’t think you should be jumping to any hasty conclusions. There are rent seekers everywhere but I’d say that most people do understand that market economies distribute resources better, except maybe for the 3-4 countries where education is restricted into promoting anti-capitalist world views.

    Finally, doing away with the rent seekers and silly structural flows in our economies is desirable but there are things that are far more important, such as a proper monetary policy, producing things and services that the rest of the world wants to buy, willingness to undertake (properly managed) risk and a well educated labor force. Greece has always had a large, silly and full of petty corruption public sector, but we also had the highest growth rate than any other western European country in the period between WWII and euro introduction. You should therefore not be surprised when Greeks such as myself go ballistic when somebody tells us that all we need to do is fire a few civil servants and things will go back to normal.

  50. Gravatar of Benjamin Cole Benjamin Cole
    25. June 2012 at 16:53

    Is this the same John Taylor who positively gushed over the effects of a 2005 QE program in Japan (in a paper he published in 2006)?

    Or the John Taylor (fierce GOP partisan) who wants Obama out?

    Or the John Taylor who says it was Carter who tried to undercut Volcker, and not the Reaganauts? Or that is was social welfare spending (not Vietnam) that drove 1960-1970ss inflation? (Wrong on both counts, it was monetary policy).

    There are so many John Taylors out there, I sometimes wonder if they are all the same man.

  51. Gravatar of Greg Ransom Greg Ransom
    25. June 2012 at 16:54

    The worlds best scientists in the essentially complex sciences routinely disagree over fundamentals.

    See the Richard Dawkins vs E. O. Wilson debate of just the last month.

  52. Gravatar of Mike C. Mike C.
    25. June 2012 at 17:00

    Let me start off by saying that I am an advocate of NGDP level targeting. But I think John B has some good points that should be addressed.

    First, when the economy has excess capacity why not lower the minimum wage?

    Why not? Does anyone here think that this wouldn’t help?

    On a related note, why not try to increase immigration levels during a recession? Wouldn’t this be a more direct way of increasing demand? Immigration tends to slow down during a recession, and this is pro-cyclical. Political tendencies make the problem worse.

    In regard to the question of paying people to dig ditches. Doesn’t it depend on the marginal propensity to consume of the people digging ditches and the people being taxed (or inflated)? If the ditch diggers have a higher propensity to consume, reducing their wages will result in less demand.

    I think John’s point is that in the end our goals should all have to do with the real economy. If there are structural barriers to real growth, we should get rid of them.

    One final thing. It probably is a good idea for governments to reduce the wages of their employees if the alternative is laying people off. But reducing wages is even harder than cutting jobs.

  53. Gravatar of Full Employment Hawk Full Employment Hawk
    25. June 2012 at 17:56

    “If tight money created the fall in NGDP which drove rates to zero, then Keynesians will misdiagnose tight money as easy money.”

    Keynesians that do that are incredibly naive Keynesians because even the simple IS-LM diagram shows that this is not the case.

    Easy money means that the LM curve has shifted down and to the right, but that gives us low intrest rates AND high output. Low interest rates and LOW output requires the IS curve to shift down and to the LEFT. This gives us low interest rates even with LM unchanged, so that the result cannot be the result of tight money. The low interest rate in that case is due to the weakness of the economy with desired investment and consumption being low.

  54. Gravatar of Full Employment Hawk Full Employment Hawk
    25. June 2012 at 18:00

    “Yes, velocity speeds up, but not so much as to overturn the money/price level correlation”

    As a matter of fact, the increase in velocity resulting from the increased money growth REINFORCES the money/price correlation.
    Keynesian analysis only becomes relevant (though not neccessarily correct) if an increase in the money supply causes a DROP IN velocity.

  55. Gravatar of Bill Woolsey Bill Woolsey
    25. June 2012 at 18:15

    John wrote:

    “It seems to me that you also have a misunderstanding of inflation. One price rising in the economy, the classic example is oil, does not cause all prices in the economy to rise unless the supply of money in circulation increases as well. If money doesn’t increase, the extra money people have to spend on oil doesn’t get spent on other items driving their prices down other things being equal.”

    You are in error.

    If the supply of oil falls, then the price of oil rises and the quantity of oil falls. Spending on oil, price times quantity, is ambiguous and depends on elasticity of demand.

    If total spending is fixed, and the demand for oil is elastic, the spending on other goods rises. If the demand for oil is inelastic, the spending on other goods fall. If the demand for oil is unit elastic, there is no change in spending on other goods.

    The reduction in the quantity of oil is a reduction in real output and real income. This reduces the demand to hold money, and so with a given quantity of money, the price level rises.

    And so, even if the demand for oil is inelastic, and spending on oil rises and spending on other goods fall, the net effect will be a higher price level. The prices of other goods will not fall enough to offset the effect of the increase increase in the price of oil.

    The way to get the price level back to its initial level is to contract the quantity of money, matching the decrease in the real demand for money due to the decrease in real output.

    You assumed that the price of oil increased while the quantity of oil remained fixed. Then, spending on oil rises, and real output is unchanged. Real income isn’t impacted, and so there is no obvious impact on the demand to hold money. With the real quantity of money decreasing, the price level return to its initial level. There is more spending on oil, and less spending on other things enough to force the price level back to its initial level.

    Now, if the demand for oil rises and the demand for other goods fall, so that total spending on output remains unchanged, the long run tendency is for the price level to remain unchanged.

    So, there is a difference between a decrease in the supply of a particular good (a supply shock) and a shift in the composition of demand.

  56. Gravatar of Full Employment Hawk Full Employment Hawk
    25. June 2012 at 19:16

    “policies “may create risks”

    Note all the MAYS in these statements. The fact the the U.S, British and a number of other advanced countries are in depressions, with output far below potential output and unemployment unacceptably high are not MAYS. They are actual realities. So the Austerians are arguing that we should not do anything to solve real problems, which are actually facing us because they MAY cause some of the things they are worrying about.

    This is preposterous. Instead of worrying about phantom menaces, our priority should be solving actual problems that are actually facing actual economies.

  57. Gravatar of Bill Ellis Bill Ellis
    25. June 2012 at 19:24

    Scott Sumner,

    More and more economists beat up Mr Bernanke and the fed over tight money…to no effect.

    Economist that agree that we need a more aggressive monetary policy beat each other up…over tribal concerns.

    How about beating up on Obama and Romney, Boehner and Reid ?

  58. Gravatar of Full Employment Hawk Full Employment Hawk
    25. June 2012 at 19:36

    “then there is no one to correct the Keynesians.”

    Paul Krugman is also calling for more expansionary monetary policy and so is Brad DeLong. So not all Keynesians are making mistakes at the policy level that need to be corrected. Market Monetarists and Keynesians both recognize that the reason economies are depressed is deficient aggregate demand and that increasing interest rates through the use of monetary restraint (as opposed to increasinginflationary expectations), since it will decrease aggregate demand, is counterproductive.

  59. Gravatar of Full Employment Hawk Full Employment Hawk
    25. June 2012 at 19:40

    “Economist that agree that we need a more aggressive monetary policy beat each other up…over tribal concerns.”

    That is precisely the problem. Market monetarists and Keynesians both agree that the problem in inadequate AD. And many (most?) Keynesians agree that more expansionary monetary policy is needed.

    One thing that is needed is that all who agree on this draw up a petition calling on Bermanke and the Fed to comply with its Congressional mandate to achieve maximum employment and publish it in the New York Times and the Wall Street Journal.

  60. Gravatar of Lorenzo from Downunder Lorenzo from Downunder
    25. June 2012 at 19:47

    John Becker: nice metaphor :)

  61. Gravatar of Bill Ellis Bill Ellis
    25. June 2012 at 20:07

    Full Employment Hawk said…

    One thing that is needed is that all who agree on this draw up a petition calling on Bermanke and the Fed to comply with its Congressional mandate to achieve maximum employment and publish it in the New York Times and the Wall Street Journal.

    I love it. How about you Professor Sumner? Ready to sign on ?

    John said…

    Paul Krugman is the most notable example of someone who never calls for repealing a single regulation but always wants more inflation or government spending.

    Not true. During Normal times Krugman is a fiscal hawk. A lot of us liberals are.
    We know that American’s Like big government, they just don’t want to pay for it.
    Repubs have been getting elected (pre depression ) by telling Americans that we can keep all our goodies and it will be cheap too…The problem they tell us is waste, or taxing the wealthy, or that “deficits don’t matter”, or some such mumbo jumbo.

  62. Gravatar of Bill Ellis Bill Ellis
    25. June 2012 at 20:16

    Mike C said…

    First, when the economy has excess capacity why not lower the minimum wage?
    Why not? Does anyone here think that this wouldn’t help?

    Me. I don’t think that would help. I don’t see how lowering peoples pay would create higher demand. And I don’t see why in the absence of demand employers would increase hiring just because wages were lower.

    How low would you like to see wages fall ?

  63. Gravatar of Full Employment Hawk Full Employment Hawk
    25. June 2012 at 21:47

    “Paul Krugman is the most notable example of someone who never calls for repealing a single regulation but always wants more inflation or government spending.”

    This kind of ideological dogma, which is not based on evidence, but makes right-wing ideologues feel good, is one of the major reasons that people from different ideologies fail to work together to promote objectives they agree on, like much more expansionary monetary policy.

  64. Gravatar of Full Employment Hawk Full Employment Hawk
    25. June 2012 at 21:58

    “First, when the economy has excess capacity why not lower the minimum wage?”

    IF AND ONLY IF the central bank is successfully controlling the NGDP growth, either directly or indirectly, lowering the minimum wage would help reduce unemployment. But if the central bank is not doing this, then it may well hurt rather than help. In an environment where the monetary policy technique the central bank has been using has reached the zero bound and the central bank is unwilling to make significant use of alternate techniques, falling wages and prices can reduce NGDP growth, which makes the problem worse.

  65. Gravatar of Full Employment Hawk Full Employment Hawk
    25. June 2012 at 22:08

    “I think John’s point is that in the end our goals should all have to do with the real economy.”

    In the end we are all dead. When an economy is in a depression, the first priority is to get the economy out of the depression. This requires that AD (NGDP growth in a dynamic context) be increased.

    The time to worrky about achieving goals with respect to the real economy is once full employment has been achieved.

  66. Gravatar of Full Employment Hawk Full Employment Hawk
    25. June 2012 at 22:08

    “I think John’s point is that in the end our goals should all have to do with the real economy.”

    In the end we are all dead. When an economy is in a depression, the first priority is to get the economy out of the depression. This requires that AD (NGDP growth in a dynamic context) be increased.

    The time to worrky about achieving goals with respect to the real economy is once full employment has been achieved.

  67. Gravatar of Full Employment Hawk Full Employment Hawk
    25. June 2012 at 22:09

    “I think John’s point is that in the end our goals should all have to do with the real economy.”

    In the end we are all dead. When an economy is in a depression, the first priority is to get the economy out of the depression. This requires that AD (NGDP growth in a dynamic context) be increased.

    The time to worrky about achieving goals with respect to the real economy is once full employment has been achieved.

  68. Gravatar of Philip George Philip George
    25. June 2012 at 22:31

    ssumner,
    You say: “It would be like two physicists disagreeing on whether a rising bar of mercury in a thin glass tube indicates rising or falling temperatures.”

    I think the correct analogy is this. There is a pot containing water with a thermometer in it. Under it there is a pile of burning coal. You observe that the temperature is not rising and hence conclude that you need to pile on more coal. What you do not see is that on the other side of the pot is stacked some ice and if the temperature of the water in the pot is not rising it is because the heat from the coal is being used to melt the ice.

    So what is the ice in the real economy that is drawing away money when it should be raising NGDP and stoking inflation. The ice consists of financial assets whose price is going up. The error you are making is the error that central banks committed on three occasions: before the Great Depression, before Japan’s Lost Decade and before the Great Recession. The high money growth results in high prices of financial assets. When, for whatever reason, the money stops growing, the prices of financial assets crash resulting in financial institutions going bust, resulting in lower lending, resulting in a contraction.

    On another note you will agree that when a bank makes a loan it creates money. So if I subtract business loans from M1 I should get a completely pointless variable. But take a look at http://www.philipji.com/busloans/M1SL+sweeps-BUSLOANS.html

    It shows M1 (seasonally adjusted) added to sweeps (after 1994) from which BUSLOANS are subtracted. Instead of a completely arbitrary graph you will observe that it mirrors the real economy very well.

    On occasion it falls from a peak with apparently no effects on the economy. But that is only if you ignore financial assets. In 1994 the fall in this variable coincides with a bond massacre. In 1984 and 1985 it falls and this coincides with a stock market crash. In 1987 it levels off after a steep rise and this coincides with the Black Friday of that year.

    Can you think of any explanation why this apparently pointless variable mirrors the economy so well? You will agree that I am not confusing stocks and flows here.

  69. Gravatar of Jim Glass Jim Glass
    26. June 2012 at 00:36

    First, when the economy has excess capacity why not lower the minimum wage? Why not? Does anyone here think that this wouldn’t help?

    It wouldn’t help. The effect of the minimum wage is a triviality in the scope of things. To win political contests the left greatly exaggerates the supposed value of increasing it and the right greatly exaggerates the destruction that would result from doing so. But that’s all political posing.

    Look at the actual numbers, see that only 2.3% of hourly workers get paid the minimum wage (with the bulk of them being kids in largely part-time jobs) and it becomes pretty clear that imagining a reduction of the minimum wage would do anything noticeable to close a points-of-GDP output gap is fantasy.

    I think John’s point is that in the end our goals should all have to do with the real economy. If there are structural barriers to real growth, we should get rid of them.

    Certainly that’s true at all times, when the economy is doing well or not.

    But when the economy is suffering a deep aggregate demand shortfall then there is the additional, separate problem of restoring aggregate demand.

    One final thing. It probably is a good idea for governments to reduce the wages of their employees if the alternative is laying people off. But reducing wages is even harder than cutting jobs.

    If you don’t think cutting wages is practical, then what’s the point of suggesting a cut in the minimum wage?

    I’ll say this: government employees have wages that are a lot more sticky than anybody else’s. As one of countless examples, here in NYC the transit workers union (already paid far above market wages) over the last three years received an 11% pay raise — taken out of stimulus funds — even as the transit system was going broke (raising fares, cutting service, etc.) and the private sector was being hammered by the whole recession.

    That “shouldn’t” happen but it did, and if reform of this kind of thing is ever comes it won’t be any time anywhere near soon enough to help counter *this* recession, or the next one either I’d wager.

  70. Gravatar of ChargerCarl ChargerCarl
    26. June 2012 at 01:48

    John:

    “Paul Krugman always argues for more spending from the government. He has always maintained the the U.S. and Japan has simply failed to spend enough. He was against the Bush era stimulus because it was enacted by a Republican administration and it involved tax cuts instead of government spending. I challenge you to find a case of him accusing Obama or any other Democrat of wasteful spending.”

    This doesn’t seem right to me. Krugman was against the bush tax cuts because they weren’t being offset by anything. He knows that using fiscal policy to manage AD when the FED is away from the ZLB is useless.

  71. Gravatar of Saturos Saturos
    26. June 2012 at 02:42

    Nick: 1 Scott: 1

    Your move, Nick.

  72. Gravatar of Peter N Peter N
    26. June 2012 at 03:30

    Part of the confusion is no agreement on what type of money to measure or what tightness is relative to.

    This is what recent Divisia M4 looks like:

    Figure 1. Major CFS Monetary Aggregates and Monetary Base, % year-over-year
    Source: Center for Financial Stability and Federal Reserve Board (for monetary base).

    2007 2008 2009 2010 2011 Feb-12 Mar-12 Apr-12 May-12

    CFS DM4 7.3% 8.5% -4.8% -0.6% 0.9% 2.7% 2.4% 1.4% 0.2%
    CFS DM4- 7.3% 2.7% -5.0% -0.4% 2.8% 3.9% 2.9% 1.7% 0.0%
    CFS DM3 8.1% 3.1% -2.3% 0.3% 3.7% 4.6% 4.0% 3.2% 1.3%
    Monetary Base 1.5% 100.7% 22.0% -0.4% 29.9% 21.9% 10.9% 5.8% 1.9%

  73. Gravatar of ssumner ssumner
    26. June 2012 at 05:11

    Returnfreerisk.

    I favor a NGDP targeting regime with 5% growth and level targeting. Where you put the trend lines depends on where you are when the program is instituted. I can’t describe what policy should have been in 2003-05 unless I know when the Fed started the regime, 1990? 2001? etc.

    Steve, 1. There is some truth to that.

    2. The corporate cash data is wrong, they are talking about bank accounts, and calling it “cash”.

    3. I agree the Fed should focus on the US, let other countries run their own monetary policy.

    John, Large numbers of economists, including myself, favor abolishing the minimum wage. Very few ecionomists favor higher inflation. I have no idea what you are reading. But abolishing the minumum wage doesn’t solve the recession.

    Returnfreerisk, What you fail to understand is that the Fed wasn’t doing 5% NGDP targeting in the mid 1990s, so you can’t start the trend line from there.

    Lorenzo, Yes, that’s hard to explain to people.

    Thanks Neal, I can’t promise anything. But if it works, and if I can understand it (a big if) I’ll post it.

    Mathieu, I don’t think debt plays an important role in the business cycle.

    Yichuan, Good analogy.

    jt, You said;

    “Wouldn’t loose policy result in speculation which while having no effect on the real economy results in unserviceable debts, (Buyers of NASDAQ on margin, or home “flippers”!), followed by a balance sheet recession?”

    Unlikely, but even if it did, I was talking about NGDP, not RGDP.
    And there is no such thing as balance sheet recessions.

    Ben, Did he really claim that social welfare spending drove the 1960s inflation? That’s clearly false.

    Mike, I favor abolishing the minimum wage–see my answer to John B.

    FEH, I would estimate that right now about 98% of Keynesians think monetary policy is acommodative. Some of those may favor an even more accommodate policy, but many don’t.

    Bill, Yes, I’ll sign that petition. And I have attacked both Obama and Romney on monetary policy.

    Philip, Lots of things mirror the real economy quite well. I favor NGDP as a target, not the monetary aggregates, however defined.

  74. Gravatar of Major_Freedom Major_Freedom
    26. June 2012 at 05:47

    Jim Glass:

    It wouldn’t help. The effect of the minimum wage is a triviality in the scope of things.

    Living in that bubble sure must be suffocating.

    The effect of minimum wage laws is HUGE, especially because a very large portion of those unemployed have labor to offer whose market value is close to or below the minimum wage.

    For example, the rate of unemployment for teenagers is 24.6%, and for blacks it is 13.6%, far above the averages in other major groups. And it just so happens that these two groups are most affected by minimum wage laws should they be enforced. Abolishing minimum wage would decrease the overall rate of unemployment substantially.

    Look at the actual numbers, see that only 2.3% of hourly workers get paid the minimum wage (with the bulk of them being kids in largely part-time jobs) and it becomes pretty clear that imagining a reduction of the minimum wage would do anything noticeable to close a points-of-GDP output gap is fantasy.

    It’s not about closing the “output gap”. It’s about allowing people who want to work, to work, according to their own terms.

    What you don’t seem to understand is that minimum wage laws don’t just affect those directly at the minimum wage. You can’t just say that only 2.3% of the workforce earn minimum wage, so it’s no big deal to abolish it. You are completely ignoring the people NOT in the workforce precisely because minimum wage laws are being enforced!

    EVERYONE whose labor has a market value below the minimum wage wont’ get hired, and so they won’t even show up in the total hours actually worked.

    —-

    It would be like you owning the only food supply in town, and you threaten to shoot anyone who shows up who is 5 foot 6 or below in height. Then, when you see that only 2% of the people who showed up are at that height, you then ignorantly say:

    “See everyone? No big deal. My threatening to shoot short people isn’t having that big of an effect. Only 2% of the people who showed up to eat are even that short! Obviously your calls that I stop threatening to shoot people are overblown exaggerations. We have bigger fish to fry.”

  75. Gravatar of BL BL
    26. June 2012 at 05:48

    Talk about a ‘big-name’ economist who embarrasses himself with the things he writes.

    http://online.wsj.com/article/SB10001424052702304765304577478561041473358.html

  76. Gravatar of Major_Freedom Major_Freedom
    26. June 2012 at 05:49

    Jim Glass:

    But when the economy is suffering a deep aggregate demand shortfall then there is the additional, separate problem of restoring aggregate demand.

    The economy is suffering from a deep state intervention problem, and an even deeper philosophical problem, as is evidenced by your posts.

  77. Gravatar of Russ Anderson Russ Anderson
    26. June 2012 at 05:56

    Scott, You are finally addressing the real problem, which isn’t the Keynesians/liberals/democrats not being supportive (or vocal) enough on the need for more monetary easing. The real problem is the John Taylor/conservative/republicans that actively oppose more monetary easing. The Fed board members most opposed to more easing are from the right side of the political spectrum. To name names Jeffery Lacker (president of the Federal Reserve bank of Richmond) who not only opposed continuing Operation Twist, but was pushing for monetary tightening in the end of 2007 (as the economy was sliding into recession).

    “How can this be? How can two economists disagree on something so fundamental?” Here is a simple example from real life. Back when I was an undergraduate there was a very energetic, charismatic outspoken Libertarian Econ professor. While most of the other professors taught standard Keynes/Samuelson economics, he would have none of it. Rather than laying out Keynes positions and then explaining why he disagreed with different parts of it, he simply refused to acknowledge Keynes, other than to denigrate those that did. To him there was no problem in economics that government did not create and for which the solution was less government, and to argue otherwise was simply proof of one being a “statist”. Atlas Shrugged was required reading. He simply tuned out anyone that did not agree with his political position, and would only listen to other true believers. Paul Krugman has talked about a similar phenomena with his “freshwater” vs “saltwater” rift in economics.

    My suspicion is that the only people John Taylor listens to all believe that monetary policy has been too lax, and since he only listens to people that say the same thing it becomes self sustaining. At this point stepping back and looking at facts that could lead to a different conclusion – a conclusion that money has been too tight – would lead to the acknowledgement that for the last decade he and his friends have been wrong. Not only that they have been wrong, but because of their influence on Fed policy they have created a huge economic mess that has cost the economy trillions of dollars of potential growth and millions of peoples jobs. It is much easier to remain in his nice safe world with friends that agree with him than to admit he is part of the problem.

  78. Gravatar of Full Employment Hawk Full Employment Hawk
    26. June 2012 at 07:09

    “The Fed board members most opposed to more easing are from the right side of the political spectrum.”

    And they were largely chosen by bankers and not by the elected representatives of the people. After all, 2/3 of the boards of directors of the individual Federal Reserve Banks are chosen by bankers. Letting representatives of bankers have and inordinate voice in the conduct of monetary policy is totally undemocratic and violates the provision of the Consitution giving the right to coin money and regulate the value thereof to Congress.

  79. Gravatar of Rien Rien
    26. June 2012 at 07:18

    When are economists going to refrain from simplistic metaphors that solidify misconceptions? There are many other things that affect the economy other than interest rates or money supply, and those factors are much larger.

    To use your own ghastly metaphor, ice can melt despite falling temperatures if something is being added to the water (like salt) to lower its melting point. But the economy isn’t like water freezing and the input isn’t only temperature.

    Let’s use a less ghastly metaphor and describe our economy as a car. Stepping on the accelerator pedal increases the speed of the car through a series of complex interactions of fuel, air, and the other parts and fluids designed to make the best use of the fuel and air. Suppose also that we can, on the fly, change the air-fuel mixture or even swap out the engine for one with more cylinders or a turbocharger.

    That metaphor sucks too, because it is a feat of engineering that creates control. The economy is not and cannot be “designed” to operate like a machine that can be controlled. But the metaphor explains where the disconnect is.

    Increasing money supply is like adding more fuel – a richer air-fuel mixture. This increases speed, or NGDP. Open market operations or other stimulus is like stepping in the accelerator pedal. But there are so many other factors between gas pedal and speed that the correlation between the two can break down. The car could be shifted into neutral or a low gear. The brakes can be applied. There can be road congestion, I.e. competition on the road of the world economy. The size of the engine, the fuel economy and the size of the fuel tank matter. Is the car on ice, gravel, or on jack stands?

    So even if you model the economy as a well designed machine that we use on a daily basis to get from A to B, and even if 90% of the time, speed is strongly correlated to the throttle position, all other factors within and beyond your control must align for the relationship to hold.

    You are saying that because the car ain’t moving fast (NGDP growth is slow), that this is evidence the accelerator pedal isn’t being pushed hard enough. Now that you know the metaphor of the car, you can resist this dumb conclusion. And the metaphor is also useful for explaining why with the accelerator pedal firmly depressed, we arent moving very fast but are using a lot of gas. So you and the others are both right and both wrong, because you are both oblivious to all the mechanisms and conditions between the gas pedal and your speed.

    Now recognize that the economy is NOT a car, and you will begin to realize the impotence of your explanations.

  80. Gravatar of Full Employment Hawk Full Employment Hawk
    26. June 2012 at 07:28

    “FEH, I would estimate that right now about 98% of Keynesians think monetary policy is acommodative.”

    Note what Krugman says in a recent Times blog about the BIS report. (I have deleted the parts about fiscal policy since those are not relevant to this issue.)

    “What to do? … The other answer is unconventional monetary policy to get around the problem of the zero lower bound: maybe unconventional asset purchases, but the obvious answer is to try to create expected inflation, so as to reduce real rates.”

    “Now look at what the serious people say: … we must not have unconventional monetary policy, because that would endanger “credibility” (where it’s not at all clear what that means).”

    “So basically, we must do nothing to fix this horrific market failure, and allow unemployment to fester instead.”

    If economists who favor a more expansionary monetary policy were to draw up a petition demanding that the Fed comply with its mandate to achieve maximum employment, I would conjecture that there would be a sizable number of Keynesian economists, including Krugman and Brad DeLong who would sign it.

  81. Gravatar of Full Employment Hawk Full Employment Hawk
    26. June 2012 at 07:36

    Note also on DeLong’s blog, a recent posting entitled “Ryan Avent Downgrades Ben Bernanke”

    Market monetarists assembling signatures for a petition calling for the Fed to obey the law on abide by the mandate to achieve maximum employment would get very significant support from prominent Keynesians.

  82. Gravatar of Full Employment Hawk Full Employment Hawk
    26. June 2012 at 07:42

    “The economy is suffering from a deep state intervention problem, and an even deeper philosophical problem, as is evidenced by your posts.”

    Economic policy making is suffering from a deep state of right-wing ideological blinders problem.

    The fact that the reason we are in a depression is because of deficient aggegate demand is clear to anyone approaching he issue with an open mind. Market monetarists and Keynesians may disagree with what is the best way to correct the problem, but both of them understand it. Laissez-faire ideologues are kept from seeing the obvious because of the rigid ideloogical blinders they are wearing.

  83. Gravatar of Full Employment Hawk Full Employment Hawk
    26. June 2012 at 07:47

    “The economy is suffering from a deep state intervention problem”

    In actual market economies market power, externalities, asymmetric information, and missin markets ARE THE RULE, not exceptions. As a result, real world economies only have an INVISIBLE PAW, not and invisible hand. Markets work reasonably well a good deal of the time. If they did not, economies beyond simple subsistence would never have developed. But actual market economies can go badly off the rails at times. And when that happens, the visible hand of the government is needed to put the economy back on track.

  84. Gravatar of Major_Freedom Major_Freedom
    26. June 2012 at 07:53

    Falling Employment Hawk:

    Economic policy making is suffering from a deep state of right-wing ideological blinders problem.

    Haha, you say that like there isn’t also a left-wing ideological blinders problem.

    The fact that the reason we are in a depression is because of deficient aggegate demand is clear to anyone approaching he issue with an open mind.

    On the contrary, it requires closed minded Keynesian economic thinking to think that. The “open mind” you’re referring to requires me to have such an open mind that my brain falls out.

    We are not in a depression because of insufficient aggregate demand. We are in a depression for the same reason there was a fall in aggregate demand. Aggregate demand doesn’t fall for no reason. The reason it fell is associated with the cause of the depression.

    I’ll leave it to you to figure out what that is.

    Market monetarists and Keynesians may disagree with what is the best way to correct the problem, but both of them understand it.

    False. Neither understand it, which is precisely why both can only think of the same flawed reasoning.

    Laissez-faire ideologues are kept from seeing the obvious because of the rigid ideloogical blinders they are wearing.

    Socialist ideologues are kept from seeing the obvious because of the rigid ideological blinders they are wearing.

  85. Gravatar of Major_Freedom Major_Freedom
    26. June 2012 at 07:56

    Falling Employment Hawk:

    In actual state action, externalities, asymmetric information, and missing freedom ARE THE RULE, not the exception. As a result, real world states only have a destructive paw, not a social benefit. Politics never works reasonably well. If they did, centrally planned economies would have been the world’s most dominant. But actual states go badly off the rails at all times. And when that happens, the invisible hand of the market is needed to put the economy back on track.

    —–

    See what I did there?

  86. Gravatar of W le B W le B
    26. June 2012 at 08:31

    Someone else who went to BIS
    http://www.reuters.com/article/2012/06/26/britain-boe-committee-idUSL6E8HQ3CT20120626
    Oh G-d!
    and
    King says, “It is very difficult to imagine monetary policy going much further and I think that my colleagues in the euro area and the Federal Reserve have said similar things.”

  87. Gravatar of TallDave TallDave
    26. June 2012 at 08:33

    2. I don’t favor higher inflation, I favor faster NGDP growth right now. And in the 57 years I’ve been alive I’ve only favored more NGDP in 4 years. There were far more cases of me calling for tighter money, indeed I thought money was too easy from the later 1960s into the 1980s EVERY SINGLE YEAR.

    Interesting point Scott, thanks for sharing.

  88. Gravatar of I don’t see any method at all, sir | Modern Monetary Realism I don’t see any method at all, sir | Modern Monetary Realism
    26. June 2012 at 09:55

    [...] always find it hilarious when some smart economist like Brad Delong or Scott Sumner pull their heads out of this keister and notice their field doesn’t even agree on the basic [...]

  89. Gravatar of Saturos Saturos
    26. June 2012 at 10:41

    Everyone should read the latest Ryan Avent – it’s epic and brilliant (nearly as good as Scott’s post above): http://www.economist.com/blogs/freeexchange/2012/06/central-banks

  90. Gravatar of ReturnFreeRisk ReturnFreeRisk
    26. June 2012 at 10:57

    “Returnfreerisk, What you fail to understand is that the Fed wasn’t doing 5% NGDP targeting in the mid 1990s, so you can’t start the trend line from there.”

    I agree. It is hard to make the statement that I did. But if I can not make the assertion that we were above trend in 2003-5, you can not claim we were below either. For the same reason.

  91. Gravatar of Full Employment Hawk Full Employment Hawk
    26. June 2012 at 11:51

    “Falling Employment Hawk”

    When you have lost the debate on the basis of logic and empirical evidence, all is not lost. You can still call your oppornent bad names.

  92. Gravatar of Full Employment Hawk Full Employment Hawk
    26. June 2012 at 11:59

    “It is very difficult to imagine monetary policy going much further”

    It really IS very difficult for people LIKE HIM to imagine monetary policy going much further. This tells us something about the limitations in their understanding of monetary economics and in their ability to think outside of their ideaolgical box. It tells us nothing about any limitations of monetary policy to restore the economy to full employment.

    People like this should not be allowed to be in charge of economic policy making because they are not up to the challenge.

  93. Gravatar of Major_Freedom Major_Freedom
    26. June 2012 at 12:37

    Falling Employment Hawk:

    When you have lost the debate on the basis of logic and empirical evidence, all is not lost. You can still call your oppornent bad names.

    Except I won on the basis of logic and empirical evidence. That name calling is just what I think of your ideas. They lead to falling employment.

    I notice you did not even attempt to deny that with state action, externalities, asymmetric information, and missing freedom ARE THE RULE, not the exception.

    I notice you just tried to insinuate that because the market isn’t perfect, that the state is, or at least can move the market towards more perfection as if the state does not itself create externalities (Oh this person is getting robbed? Let me externalize the costs of protection by stealing from everyone), asymmetric information (Excuse me CIA and FBI and NSA and Pentagon, can you tell me all your secrets? Falling Employment Hawk says there is a problem of asymmetric information in the market), and missing freedom (Hey government, the market process prevents me from consuming enough fake dog poop for my liking, can you please point a gun at the food makers so as to force them to produce fake dog poop instead? There’s a missing market here).

  94. Gravatar of Major_Freedom Major_Freedom
    26. June 2012 at 12:39

    Falling Employment Hawk:

    People like this should not be allowed to be in charge of economic policy making because they are not up to the challenge.

    As with all socialist minded people who want to control the economy, up and coming socialist wannabes always critique the programs of the existing holders of power, never once addressing the CRAZY idea that maybe the problem is central planning, not the people in charge.

  95. Gravatar of Mathieu Dufresne Mathieu Dufresne
    26. June 2012 at 14:44

    I know you think debt isn’t important and that’s precisely the problem, since debt is the cause of the crisis and the reason why it seems to be so intractable. Moreover, by ignoring the dynamics of debt, economists actually helped cause the crisis in the first place rather than prevent it. After miserably failing to see it coming, just like meteorologists who would fail to see an hurricane coming, they are now trying to explain it by relying on exogenous shocks which happens “for some reasons” like if it came out of nowhere.

    Even a quick look at the datas of debt-to-GDP ratios over the last century should make it screamingly obvious. It would be a coincidence? Moreover, the correlation between the change in debt an unemployment from 1920 to 1940 is -0,938 and from 1990 to 2010, it’s -0,955. Those are far higher correlation than the change in M1 correlation with unemployment which lead Bernanke to blame tight monetary policy for causing the Great Depression and he didn’t even looked at M0. On top of that, he ignores the role of debt for purely theoretical reasons without even looking at the datas, I call that cherry picking to avoid challenging the theory.

    You are arguing that contractionary monetary policy is what helped cause the crisis, but you define contractionary monetary policy by low nGDP growth, it’s a tautology. Of course, if nGDP is growing fast enough, a crisis like this wouldn’t happen and using that definition, a debtdeflation will always be associated with “contractionary” monetary policy regardless how accomodative the monetary policy may be. What actually happens is that a slowdown in the rate of growth of debt will lead to a slowdown in the rate of growth of the money supply and a decrease in the “velocity” of money (since the usual definition of velocity is PT/M, another tautology). Now, I hope you won’t adopt that usual effortless superiority attitude and start claiming Keen doesn’t understand those concept without having aknowledge what lead him to say that. His dynamic modelling technique provides deeper insights on those concepts than any other tools you know. Mathematically, you can’t talk about the velocity of money without incorporating time into your equations. If you put the effort, you will realize that the only way you can get equilibrium is if all rates of change are zero, which will never happen in the real world.

  96. Gravatar of Full Employment Hawk Full Employment Hawk
    26. June 2012 at 20:31

    “socialist minded people”

    Calling people who do not blindly worship at the alter of the false god of Laissez-faire “socialists” is another example of name calling. At the academic level the term is used to prevent rational discussions of what the optimal amount of government intervention in the economy is. The same holds for calling the use of monetary and/or fiscal policy to get an economy out of a depression “central planning.”

  97. Gravatar of Full Employment Hawk Full Employment Hawk
    26. June 2012 at 20:38

    “I notice you did not even attempt to deny”

    I do not engage in debates about substance with people that do not address me by the nickname I have chosen. But I will criticise them for engaging in name calling.

  98. Gravatar of Benjamin Cole Benjamin Cole
    26. June 2012 at 21:06

    Side note:

    Yes, in a review of Meltzer’s history of the Fed, Taylor noted the 60s welfare-spending inflation connection (while mentioning not Vietnam), and then went on to note how the Carterites wanted to down Volcker. (Carter actually appointed Volcker).

    Taylor is a nice guy, very smart, but a GOP man to the core. That’s fine—but we have to know that when reading his stuff.

  99. Gravatar of Jim Glass Jim Glass
    26. June 2012 at 21:09

    Mike C.:

    “‘First, when the economy has excess capacity why not lower the minimum wage? Why not? Does anyone here think that this wouldn’t help?’”

    Me:

    “It wouldn’t help. The effect of the minimum wage is a triviality in the scope of things”.

    MF:

    Living in that bubble sure must be suffocating. The effect of minimum wage laws is HUGE, especially because a very large portion of those unemployed have labor to offer whose market value is close to or below the minimum wage.

    For example, the rate of unemployment for teenagers is 24.6%

    Yup, that’s 1.4 million kids. Really bad for them, no doubt. A good number of them — certainly not all — being priced out of the market by the minimum wage. They’d be better off without it.

    Now let’s imagine we do get rid of the minimum wage and assume this *instantly* cuts that rate in half, creating 700k more jobs for them at say $4 an hour, largely part-time.

    With that we come a *huge* way towards making up for the loss of five million full-time jobs at over >$20 an hour!

    Oh, no. We don’t. The wage gain is a good 2% of the wages lost.

    MF, your arithmetic never improves, your judgment never improves … but you never cease to entertain!

  100. Gravatar of Saturos Saturos
    27. June 2012 at 00:53

    Scott, couldn’t the Keynesian approach still be useful under high inflation, if you looked only at real interest rates? They go down due to both the liquidity effect and falling investment under inflation.

  101. Gravatar of Major_Freedom Major_Freedom
    27. June 2012 at 05:11

    Jim Glass:

    Your analysis and your reading comprehension are just sloppy.

    1a. You can’t just assume that a cutting of the nominal wage in half will take place with an unchanged overall demand for labor at that new wage rate. You are fallaciously holding the demand for labor constant. If wage rates fall with the abolition of the minimum wage law, then it is almost a certainty that the demand for labor will rise, since all the investments that were postponed up until that time, awaiting a fall in costs, can take place. So there is no reason to believe that a mere 700k of the 1.4 million will find work. The entire supply of workers can find work if wage rates fall by MORE than half, AND the demand for labor at that wage rate increases from the postponed investments.

    1b. Alongside this phenomena of investment increasing due to wage rates falling, as postponed investments are in fact made, there will also be an increase in the demand for capital goods, which workers require to perform their labor. This has the effect of increasing profitability throughout the economy, since revenues earned from the sale of capital goods earn profits for those sell them, and the costs incurred by the investors, are lower than the purchase price due to the costs being incurred over time through depreciation. This boost in profitability through investment will then serve to enable postponed investments one step removed to be made once again, and that can boost the demand for labor.

    2. You are ignoring the fact that with minimum wage law in place, it adds a further intensity on unemployment by way of those with higher market value of their labor taking the artificially higher valued jobs, rather than those who are less skilled and less able to compete on anything other than price taking those jobs. So by abolishing minimum wage, the fall in wage rates will make those with higher market rate, start competing in their own market once again. That will put downward pressure on those wage rates. So it’s not just about those at the minimum wage.

    3. There are many other factors besides minimum wage laws that reduce employment, which I did not mention in my last post, because I only wanted to speak of minimum wage there. But there are of course other insidious forms of government interference that increase unemployment. A major one is union legislation that coerces employers into raising wage rates. About 15% of the workforce are under union contract. In every single one the government interferes (“bargaining in good faith”) that results in higher wage rates for the “$20 wage” level you referred to above. Abolishing all union legislation that artificially increases wage rates will also reduce unemployment. There is also the fact that unions end up increasing the wage costs in NON-union jobs too, as non-unionized companies have to offer additional benefits the unionized workers are given in order to compete.

    4. The government also keeps unemployment high by paying people to stay unemployed. Taxpayer financed unemployment insurance, the “99ers”, which enables people to stay unemployed for a long time. This has the vicious effect of making those workers even less attractive to potential employers, since their skills drop off and their work mentality is diminished. The 99 week welfare program has the effect of wage rates having to fall even more in order to make those workers attractive, so many of those who used to make $20 an hour, become an invisible addition to those who have a market value in the minimum wage range. So you cannot possibly claim that those who used to make $20 an hour over a year and half ago, are still able to earn that much now given their labor is now worth less.

    5. Then there is the regulatory red tape that the average employer has to go through to hire a worker, which also artificially increases the price of labor, the removal of which will enable employers to hire workers more quickly.

    ——

    Jim Glass, it is very obvious that you have an incentive to minimize the effects of “real side” downward pressure on employment, so as to maximize the seeming need for your desired solution of “demand side” printing and spending of money. Your economics is incredibly sloppy. It’s almost like you are purposefully keeping yourself ignorant so that you don’t have to accept the fact that the problem isn’t a lack of printing money, but government intervention.

    You don’t know economics, and you don’t know how markets work.

  102. Gravatar of ssumner ssumner
    27. June 2012 at 08:16

    Russ, You said;

    “Scott, You are finally addressing the real problem, which isn’t the Keynesians/liberals/democrats not being supportive (or vocal) enough on the need for more monetary easing. The real problem is the John Taylor/conservative/republicans that actively oppose more monetary easing. The Fed board members most opposed to more easing are from the right side of the political spectrum.”

    Finally? Since you are obviously new to my blog you don’t seem to understand that I’ve been doing this for more than 3 years. Both sides deserve lots of blame, as both sides of the FOMC oppose stimulus. All 6 Obama appointees oppose stimulus. Only Evans supports it.

    Rien, You said;

    “There are many other things that affect the economy other than interest rates or money supply, and those factors are much larger.”

    Interest rates don’t affect the economy at all, they are affected by the economy. And yes, there are lots of more important things than monetary policy, as everyone knows.

    FEH, Your comment doesn’t in any way refute the quotationn you provide. I stand my my claim that 98% of Keynesians think monetary policy is currently accommodative. Which is precisely the problem.

    returnfreerisk, I don’t follow your comment. In any case, I don’t have strong views on policy during 2003-05.

    Matthieu, You said;

    “You are arguing that contractionary monetary policy is what helped cause the crisis, but you define contractionary monetary policy by low nGDP growth, it’s a tautology”

    I get this comment a lot, and it makes no sense to me. There is no tautology here at all, unless you define a crisis as falling NGDP–in which case Zimbabwe’s been the most successful economy in the world over the past 10 years. Are you seriously arguing that the Fed could not have prevented NGDP from falling in 2009?

    Ben, Thanks for that info.

    Saturos, In the past it was very difficult to estimate real interest rates, as we lacked TIPS markets in the 1970s. Bernanke claims real interest rates are not a good indicator of monetary policy, and I agree with him. Real rates have been low in the US for several years, and yet money is tight.

  103. Gravatar of ssumner ssumner
    27. June 2012 at 08:21

    W le B, That’s a horrible interview.

  104. Gravatar of Mathieu Dufresne Mathieu Dufresne
    27. June 2012 at 09:01

    Falling nGDP is basically what defines a debtdeflation along with a fall in debt levels, which is not the same thing as hyperflation or stagflation…

    Maybe the FED could have overtunrned the situation in 2009 (which I doubt), but it would have been through influencing the rate of change of debt and ultimately, you will always reach a point where you won’t be able to overturn the situation. Governement spending can prevent falling nGDP but at the cost of increased governement debt and you will still be stuck in a Japan like recession like we are now.

    The bottom line is that ignoring the dynamics of debt is actually what helped cause this crisis and what will avoid implementing a effective solution. You make a pretty good case about nGDP targeting and there’s no doubt in my mind it’s a better tool for monetary policy than inflation targeting, but thinking it could avoid a depression while still ignoring debt (which is the most important thing you should look at)is mostly wishful thinking.

  105. Gravatar of TallDave TallDave
    28. June 2012 at 09:57

    Real rates have been low in the US for several years, and yet money is tight.

    Yes, and I think that’s an important point to get across to most people — low interest rates are not equivalent to loose monetary policy, esp. if NGPD growth is low!

  106. Gravatar of Major_Freedom Major_Freedom
    28. June 2012 at 10:36

    Yes, and I think that’s an important point to get across to most people — low interest rates are not equivalent to loose monetary policy, esp. if NGPD growth is low!

    An equally important point to get across is that low interest rates are not equivalent to tight monetary policy either, esp. if money supply growth is accelerating!

  107. Gravatar of Economics vs. Science Economics vs. Science
    29. September 2012 at 01:50

    [...] the light of previous discussions here I found this remark from Scott Sumner very interesting. After observing that in a recent post he and John B. Taylor agreed almost [...]

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