Let’s create a world where Cochrane, Mulligan, et al, are always right

So macroeconomics is a complete mess.  One third of all macroeconomists think the problem with the economy is structural, and more AD won’t help.  Another third think it’s an AD shortfall and that the Fed needs to fix it.  And another third also thinks there’s an AD shortfall, but doesn’t blame the Fed and/or doesn’t think the Fed is capable of fixing the problem.  I’m leaving out those who overlap, or who can’t tell us what they really think.

So what do we do when we don’t know what the hell we are doing?  The answer is pretty obvious, isn’t it?

Folks, this isn’t rocket science. . . .

We stabilize AD.  Then all the problems in society will be AS problems.  The only macroeconomists we’ll need are supply-siders.  And of course we do that by having NGDP grow at a steady rate of 5% per year.  I should be more specific, we’ll have expected NGDP grow at a 5% rate each year.  Then there will be no expected demand-side problem, hence nothing to debate.

To put it another way, we need 5% NGDP targeting to better understand our own field.  Yes, that’s right, I’m calling for experimenting with the economy, to improve the science of economics.  And I’m claiming that if we do so all the vicious fights will end.  The lions will lie down with the lambs, and the hawks and doves will stop squabbling.

How can I entertain such a utopian vision?  Because we basically did it for several decades before 2008.  And it worked fine.  The left and right stopped debating stabilization policy, and focused on long run structural issues.  I’m calling for a return to that policy; you know, the one that worked.

We need 5% NGDP targeting to fix the economy.  And we need 5% NGDP targeting to fix the economics profession.  I’m not sure which is in worse shape.

Oh yeah, I forgot about the one third who worry that fiat money central banks might not be able to debase their currencies.  The people who fear the mysterious zero bound.  OK, target NGDP futures contracts; there is no zero bound in the price of that financial asset.  Then we are done.  Economics can resume being a science, and stop being a soap opera.

I suspect we also have a Great Stagnation, and that in the future we’ll wonder why we wasted so much time on easy to solve problems like AD, and didn’t address the really hard problems like long run fiscal imbalances and tax reform.

PS.  Since Casey Mulligan was severely (and justifiably) criticized for his recent post, let me point out one criticism by Brad DeLong that went overboard:

The third joke is the entire third paragraph: since the long government bond rate is made up of the sum of (a) an average of present and future short-term rates and (b) term and risk premia, if Federal Reserve policy affects short rates then–unless you want to throw every single vestige of efficient markets overboard and argue that there are huge profit opportunities left on the table by financiers in the bond market–Federal Reserve policy affects long rates as well. Note the use of the weasel word “largely”.

This criticism addressed the following paragraph by Mulligan:

Eugene Fama of the University of Chicago recently studied the relationship between the markets for overnight loans and the markets for long-term bonds…. Professor Fama found the yields on long-term government bonds to be largely immune from Fed policy changes…

DeLong seems to suggest that the EMH tells us that a cut in short term rates should also reduce long term rates.  But that’s not true.  Monetary stimulus reduces short term rates via the liquidity effect, and raises future expected short term rates via the income and inflation effects.  There are numerous cases where a Fed announcement moves short and long rates in the opposite direction.  So it might be the case that long rate is largely unaffected by Fed engineered changes in the fed funds rate.  I haven’t studied the issue, but the claim certainly doesn’t violate the EMH.

Of course the Mulligan piece is still almost complete wrong, for all sorts of reasons.  Nick Rowe has a nice critique.


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51 Responses to “Let’s create a world where Cochrane, Mulligan, et al, are always right”

  1. Gravatar of Morgan Warstler Morgan Warstler
    29. July 2012 at 06:07

    yeah EXCEPT, under 5% NGDPLT:

    1. 2008 didn’t happen, because

    2. in 2005 Barney Frank could give bad credit risks a house for “fairness”

    Indeed, as Evan rightly notes, historically under 5% NGDPLT – 71%, that’s right SEVENTY ONE PERCENT of the time, we should have had TIGHTER MONEY.

    That’s a plan Ron Paul would accept over the status quo.

    And then there is CLARITY of a single target that SPECIFICALLY makes clear that giving public employees pay raises DIRECTLY raises bank rates….

    So public employees get no pay raises.

    ——

    This is the needed addendum to each and every post Scott rights where he tries to jag right without being too noticeable.

  2. Gravatar of Morgan Warstler Morgan Warstler
    29. July 2012 at 06:08

    I want to repeat this…

    It would be “just like” it was over the last 30 years.

    It would be the last 30 years with tighter money 71% of the time.

  3. Gravatar of K K
    29. July 2012 at 06:17

    Scott,

    “I forgot about the one third who worry that fiat money central banks might not be able to debase their currencies.  The people who fear the mysterious zero bound.  OK, target NGDP futures contracts”

    I guess I’m one of the people in that category. It’s not about “targeting” though. You’re right that a futures market could possibly solve the problem, but only if the Fed can manipulate them, not just talk about them. If we complete the market in NGDP *and* lock that market at an appropriate value, then I see little opportunity for the economy to end up in any other state. The unlimited arbitrage opportunity in real investment vs short NGDP futures would, as far as I can see, provide unlimited stimulus.

  4. Gravatar of ssumner ssumner
    29. July 2012 at 07:19

    K, Perhaps I should have said make dollar bills freely convertible into NGDP futures at a price equal to the policy goal.

  5. Gravatar of Vivian Darkbloom Vivian Darkbloom
    29. July 2012 at 07:39

    “So it might be the case that long rate is largely unaffected by Fed engineered changes in the fed funds rate. I haven’t studied the issue, but the claim certainly doesn’t violate the EMH.”

    Thanks Scott. I’m sure Gene Fama will be happy to hear that, too.

  6. Gravatar of Becky Hargrove Becky Hargrove
    29. July 2012 at 08:50

    Stabilize AD now. Can I hear a yell?

    . . .First things first! . . . First things first!. . . First things first!

  7. Gravatar of Neal Neal
    29. July 2012 at 09:09

    … so the economics profession has four thirds and change?

  8. Gravatar of Negation of Ideology Negation of Ideology
    29. July 2012 at 10:27

    ” I’m calling for a return to that policy; you know, the one that worked.”

    I like it. A “Return to Normalcy”. I know we like to debate whether we can improve on what worked, and we should continue to do so(5% NGDPLT? 4.5? 3%?), but starting with what worked before seems pretty sensible to me.

  9. Gravatar of Major_Freedom Major_Freedom
    29. July 2012 at 10:32

    ssumner:

    So what do we do when we don’t know what the hell we are doing? The answer is pretty obvious, isn’t it?

    Folks, this isn’t rocket science. . . .

    We stabilize AD. Then all the problems in society will be AS problems. The only macroeconomists we’ll need are supply-siders.

    *Sigh*, as expected, Sumner COMPLETELY IGNORES AS problems that arise from AD management itself.

    The reason macro-economics is such a mess is precisely because of political strategists who deny that AD management is a source of AS problems.

    It is not true that with stable AD, that all problems must arise from the AS side. It would be like saying keeping people permanently drunk so that they never sober up to correct their behavior, can only ever result in problems that arising from causes non-alcohol related. After all, if everyone stayed drunk, then they would never have any headaches and other symptoms of hangovers, right? That if they start to develop liver problems, and brain damage problems, it has to be due to something other than “alcohol management”, right?

    —————-

    Macro-economics will NEVER improve unless folks like Sumner have the courage to realize that AD management by the state, even “stable AD”, causes AS side problems. For AD management distorts true market valuations of actions and commodities.

    Humans are not robots. We’re not predisposed to “spending” a constant 5% more every minute, every hour, every day, every year, every decade. If I want to spend 10% more today than I did yesterday, and then 25% less tomorrow than I did today, then the “problems” I cause for others in them not earning an increase of 5% annualized every single day, is certainly not due to my lack of spending a constant 5% more every day. It’s not my fault that they don’t earn a constant 5% more from me and everyone else. It is because of MY PERSONAL VALUATIONS of other people’s actions that has led me to not spending a constant 5% more each day.

    Why can’t investors be left alone to invest according to actual consumer preferences, instead of investing in accordance with money and interest rate signals that have nothing to do with consumers, but non-market agents who are not omniscient Gods, who can’t possibly know how much spending there ought to be or what interest rates ought to be?

    Anyone who initiated coercion to force people to use a particular currency, and then printed and spent money to prevent the “fluctuations” in spending I otherwise would have brought about, cannot possibly claim to be innocent from any and all AS problems that arise from that behavior. For investors would be making choices based on part on that money printing, and not my consumer preferences. Investors would be making investment choices not in accordance with my spending patterns in the division of labor, but in accordance with some external to the market agent who is not participating in the division of labor, and who is violating private property rights.

    How in the world can these people be a “solution”? How can these people not be causing problems precisely because of their fluctuating money printing that is intended to lead to an arbitrary total spending out of others?

    This is the core issue: The false belief that without arbitrary level constant growth AD management from non-market agents, it is somehow inevitable that market agents will be prone to periodically depressing themselves with high unemployment and low output that they cannot get out of unless someone becomes “powerful” enough to violate everyone else’s private property rights, to rob from them, and to mislead investors into investments not in line with voluntary consumer preference, that these “problems” allegedly inherent in voluntary trade will go away.

    No one individual knows how much money and spending their ought to be. No one individual is intellectually capable of knowing that humans are best off when total spending increases by 5% annualized every single minute.

    Everything coming from central bank apologists is nothing but dressing windows in monetarist gobbledygook. Keep everyone drunk, and the spikers of the punchbowl can claim to not be responsible for any health problems that arise, because they solved the problems of hangovers which is allegedly inherent in being sober.

  10. Gravatar of Razer Razer
    29. July 2012 at 12:16

    Scott, how badly do you want to become a central economic planner? Why is it that all economic planners suffer from the ‘forgot to carry the 2 rule.” When the previous set of economic plans fail, the economic planners review their charts and become convinced that this time will be different. They forgot to carry the 2 in their last set of magic equations, but the problem is fixed and this set of plans will work perfectly. When will you ever learn, Scott? Central Economic planning DOESN’T work. Never has, never will. Your entire economic education is about as useful as getting a Phd in ‘creationist evolution.’

  11. Gravatar of Becky Hargrove Becky Hargrove
    29. July 2012 at 12:33

    Razer,
    NGDP level targeting is not about central planning. It is about providing clarity as to aggregate spending, and then getting out of the way so that individuals can proceed with their own plans.

  12. Gravatar of Winton Bates Winton Bates
    29. July 2012 at 12:58

    Great post, Scott!

  13. Gravatar of W. Peden W. Peden
    29. July 2012 at 13:46

    Spot on.

  14. Gravatar of Bonnie Bonnie
    29. July 2012 at 14:12

    Where does the IOR policy fit into this? I’m assuming we’d need to get rid of that in order to return to what worked, including a free market in lending.

  15. Gravatar of nickik nickik
    29. July 2012 at 14:42

    Hi Scott,

    One question, Im not sure if you have allready answerd it somewhere. Why 5%? Why not 0 or 3 or 7?

    I know why you object to selgins productivity norm (0% growth) but why 5%?

  16. Gravatar of W. Peden W. Peden
    29. July 2012 at 15:01

    nickik,

    IIRC, Selgin’s proposal would imply an NGDP target of about 2% a year, i.e. 2% – 3% real GDP trend rate = 1% deflation = deflation at the trend TFP rate.

  17. Gravatar of Federico S Federico S
    29. July 2012 at 15:20

    Scott, almost any economist would agree with you that we should stabilize AD. However, many economists (perhaps most) would not agree that stable AD is represented by NGDPLT. So the latter is what you really have to convince other people of.

  18. Gravatar of dtoh dtoh
    29. July 2012 at 15:46

    Scott,
    Stop talking about “NGDP futures contracts”. They are not going to happen if you continue to use that nomenclature. In case you didn’t notice financial derivatives are not very popular in the the current political arena. Start pushing for the same thing with a different name….Fed (or Treasury) issued Growth Adjusted Income Notes, i.g. “GAINS”. Issued in various maturities of 90 days and longer. Pays the same rate of interest as a Treasury of comparable maturity. Principal is inversely linked to NGDP growth over the life of the note or the quarter immediately prior to maturity. E.g. if NGDP in the proceeding quarter is 3% you get 102% on your principal. If it’s 7% you get 98%.

    This concept is simple enough that you would probably even get some right wing morons from the Ron Paul school of economics to support it.

  19. Gravatar of dtoh dtoh
    29. July 2012 at 15:57

    Just to amplify on GAINS, it’s probably best if they are issued by the Treasury. FED OMO could then consist solely of buying and selling GAINS to keep the price equal to Treasuries of comparable coupon and maturity. E.g. if GAINS are trading at 101 (expectation of below target NGDP growth), the FED keeps buying until the price goes to par.

  20. Gravatar of Greg Ransom Greg Ransom
    29. July 2012 at 15:59

    “Stable monetary conditions require that the stream of money expenditures is the fixed datum to which prices and wages have to adjust themselves, and not the other way around”

    - F. A. Hayek

  21. Gravatar of Greg Ransom Greg Ransom
    29. July 2012 at 16:11

    Note well — gov union worker control of state, county & city governments in California and in other Blue states means that prices and wages are NOT adjusting to the fact of a stable stream of money expenditures — union controlled governments have massively expanded gov worker compensation (wages, benefits & pensions) as far as the eye can see, firing new employees & halting the hiring of new employees, and bankrupting governments across the nation, in a cascade that has only begun.

    The ‘sticky wages’ problem is a product of government at every level, and is mainly a union problem, Blue State gov workers & TARP “bailed out” ie taxpayer subsidized overpriced/non-competitie union workers at GM and fat cat financial industries ‘workers’.

    Scott, are you advocating a stable stream of monetary expenditures, or are you actually advocating constantly expanded money & constant credit expansion to solve the ‘sticky wages’ problem created by over priced, over paid Blue state gov union workers and “bailouts” beneficiaries at GM & related firms and on Wall Street.

  22. Gravatar of Greg Ransom Greg Ransom
    29. July 2012 at 16:20

    Patently the purchases, taxes rates, expenditure promises and interest rate policies of the U.S. government is NOT adjusting to the fact of a stable stream of money expenditures — and is not doing so an a truly MASSIVE scale.

  23. Gravatar of Benjamin Cole Benjamin Cole
    29. July 2012 at 16:52

    Another terrific post by Scott Sumner. Exactly.

  24. Gravatar of Benjamin Cole Benjamin Cole
    29. July 2012 at 16:58

    BTW, you notice how the economists talking about “structural impediments” never talk about the 802,000 barrels (yes, barrels) a day of federal mandated ethanol we produce and consume? The anti-immigration policies of the federal government? The $1 trillion (yes, $1 trillion) we spend every year of Defense, VA and Homeland Security? The unlimited home mortgage interest tax deduction? Federal or cross-subsidies for rural roads, water systems, power systems, telephone service, postal service, train stops, airports and crops?

  25. Gravatar of Majority_Freedom Majority_Freedom
    29. July 2012 at 17:40

    Benjamin Cole:

    BTW, you notice how the economists talking about “structural impediments” never talk about the 802,000 barrels (yes, barrels) a day of federal mandated ethanol we produce and consume? The $1 trillion (yes, $1 trillion) we spend every year of Defense, VA and Homeland Security? The unlimited home mortgage interest tax deduction? Federal or cross-subsidies for rural roads, water systems, power systems, telephone service, postal service, train stops, airports and crops?

    I notice that some people make sweeping pronouncements about whole populations of economists, despite the fact that such pronouncements are unwarranted, because there are economists who talk about structural impediments who do talk about these types of interventions. It’s just that there are so many of these impediments that you will never find any economists who talks about them all.

  26. Gravatar of Majority_Freedom Majority_Freedom
    29. July 2012 at 17:44

    Razer:

    Scott, how badly do you want to become a central economic planner? Why is it that all economic planners suffer from the ‘forgot to carry the 2 rule.” When the previous set of economic plans fail, the economic planners review their charts and become convinced that this time will be different. They forgot to carry the 2 in their last set of magic equations, but the problem is fixed and this set of plans will work perfectly. When will you ever learn, Scott? Central Economic planning DOESN’T work. Never has, never will. Your entire economic education is about as useful as getting a Phd in ‘creationist evolution.’

    That pretty much sums it up, doesn’t it? All socialist minded thinkers proceed in this way. They always believe the problem of central planning can be solved if only the plan changed.

    Becky Hargrove:

    NGDP level targeting is not about central planning.

    That’s incorrect. NGDP level targeting IS a central plan. It is a central banking plan that sets money production, and thus influences spending and interest rates.

    It is about providing clarity as to aggregate spending, and then getting out of the way so that individuals can proceed with their own plans.

    Getting out of the way would entail an abolition of monetary policy.

    The Fed is creating new plans when it prints and spends money. It also affects other people’s plans.

    NGDP targeting is not a market process. It is a central planning process.

  27. Gravatar of ssumner ssumner
    29. July 2012 at 17:45

    Neal, I’m not too good at arithmetic.

    Bonnie, We should drop that at some point. But it’s not the highest priority.

    nickik, That’s what we did in the Great Moderation, and I’ve never seen a persuasive argument to change it. If it ain’t broke . . .

    Federico, Well however we define AD, we need to stabilize it. AD is certainly not inflation, so we obviously shouldn’t be targeting inflation.

    dtoh, I don’t favor tying it to some sort of TIPS-type NGDP bond, as it wouldn’t give a clear NGDP forecast.

    Greg, You and I know Hayek said that, but we won’t be able to convince MF in a 100 years.

    Thanks Ben and W. Peden and Winton.

  28. Gravatar of Mark A. Sadowski Mark A. Sadowski
    29. July 2012 at 18:53

    Scott,
    I’m sure you’ve seen this but just in case:

    “On demand, I’ll make two assumptions I don’t believe. The first is that the ECB can determine nominal GDP for the euro area. Under liquidity-trap conditions, this is a very problematic assumption, and I don’t mean to drop my skepticism for other purposes. For right now, however, it’s useful, I think, to use nominal GDP as a proxy for the whole range of possible expansionary policies the ECB might follow.”

    http://krugman.blogs.nytimes.com/2012/07/29/internal-devaluation-inflation-and-the-euro-wonkish/

    So Krugman grudgingly assumes that the ECB can do NGDPLT in order to explain why higher NGDP would be very helpful in the eurozone right now. But it’s not at all clear to me why he thinks monetary stimulus cannot work there given that:

    1) The ECB only finally dropped its repo rate below 1.0% two weeks ago. If they’re truly in a liquidity trap why is the repo rate still 0.75%? They still haven’t even been in ZIRP yet and it’s been nearly 4 years since the depression started.

    2) The ECB has expanded its balance sheet by far less than the Fed. Before LTRO last fall it had only increased by 70% over precrisis levels, whereas in the US it has been 330% of precrisis levels since the end of QE2 over a year ago. So they have a lot of QE to do just to catch up with the US.

    3) The whole problem is that the GIIPS are trying to run deficits without a central bank backstopping them. All the ECB needs to do is “print” some euros and buy GIIPS debt under the Securities Markets Programme (SMP), something it had been doing until late last summer. This will solve the sovereign debt crisis & lower long term rates locally, end the need for fiscal austerity and consequently direct monetary AND fiscal stimulus to the portion of the eurozone in need of aggregate demand right now all in one fell swoop. You don’t have to be a Market Monetarist to think that would be highly effective.

    The eurozone really only has two options: 1) a more expansionary monetary policy with the ECB buying up GIIPS debt through the SMP, or 2) say good bye to the euro. There’s no point in looking for alternative solutions at this point, as they’re totally out of time.

    Thus I’m not surprised that Krugman is endorsing more monetary stimulus. But note that he has to go out of his way to stress his deep skepticism about NGDPLT working there, because to do otherwise, would suggest it might work here.

  29. Gravatar of Steve Steve
    29. July 2012 at 18:54

    I agree. Ironically, though, the Fed seems intent on creating a world where Krugman and Summers, et al, are always right.

  30. Gravatar of dtoh dtoh
    29. July 2012 at 19:25

    Scott,
    I don’t favor tying it to some sort of TIPS-type NGDP bond, as it wouldn’t give a clear NGDP forecast.

    1. Not true. It would carry a normal coupon so the differential in yield/price to a standard Treasury would be a perfect indicator of NGDP expectations.

    2. A note would have much better liquidity.

    3. NGDP futures will never fly politically. They are too difficult for the average politician/voter/media pundit to understand.

    4. In order to get this off the ground, you could get private issuer to do a GAINS note pretty easily while waiting for the Treasury and Fed to move forward. This would be a heck of a lot easier than trying to set up an exchange traded futures contract.

    I used to do this stuff for a living. A “GAINS” note is absolutely the right way to go. It’s much better in every respect than a futures contract.

  31. Gravatar of dwb dwb
    29. July 2012 at 19:27

    “Krugman grudgingly assumes that the ECB can do NGDPLT in order to explain why higher NGDP would be very helpful in the eurozone right now. But it’s not at all clear to me why he thinks monetary stimulus cannot work”

    krugman keeps calling for the ECB to do more. i hope the FOMC adopts an open emdef QE program, it would get the market less focused on the quantity or the calendar, but the desired (by the FOMC) end-state for the economy. thatll go a long way towards silencing the MMTrs, the Cochranes, the Mulligans, the structuralists, the Austrians,… although i suspect they will all find a way to declare victory.

  32. Gravatar of Majority_Freedom Majority_Freedom
    29. July 2012 at 20:01

    ssumner:

    Greg, You and I know Hayek said that, but we won’t be able to convince MF in a 100 years.

    I accept that’s what Hayek said. What I have pointed out many times, which you seem like you won’t accept in 100 years, is that Hayek ALSO argued the opposite. He was not consistent. He also said that country level central banks, if they are to exist, should mimic what would happen in a world central bank economy as close as possible, which of course means fluctuating country level spending levels.

    Hayek also argued in favor of a free market in money.

    I never once denied Hayek making the statements that are being cited by inflation apologists.

  33. Gravatar of Major_Freedom Major_Freedom
    29. July 2012 at 22:52

    ssumner:

    We stabilize AD. Then all the problems in society will be AS problems.

    Suppose the central bank targeting a single firm’s nominal demand, instead of the total demand of all firms taken together. Suppose the central bank increased the demand for this one firm’s output by 5% annualized each day.

    Would it be correct to say that the events at this firm: good or bad, beneficial or costly, in the preferences of individuals who may or may not be related to this firm’s activity, would be a function of ONLY the “real” side decisions that are made at this firm? That whatever happens, monetary policy becomes irrelevant and the only problems that arise are real side problems?

    If it’s not correct to say the above, then it’s not correct to say the same thing if the central bank were targeting two firms instead of one, or three firms, or four firms, or N firms!

  34. Gravatar of Wadolowski Wadolowski
    30. July 2012 at 01:58

    NGDP Tareting, yes. But would that resolve the problems with constantly increasing private debt???

    Is that a healthy (and sustainable) situation that private debt constantly rises?

    Why this category (debt) isn’t reflected in any macro equation?

    Would this resolve all those banking problems???

    http://www.debtdeflation.com/blogs/2012/01/03/the-debtwatch-manifesto/

  35. Gravatar of Michael Michael
    30. July 2012 at 03:02

    “NGDP targeting is not a market process. It is a central planning process.”

    Under this line of thinking, anything the central bank does – including nothing – is central planning.

    It’s all well and good to want a currency system that has no central bank, but as long as one exist, its decisions – whether to act or not act, whether to loosen or to tighten, are all central planning.

  36. Gravatar of Negation of Ideology Negation of Ideology
    30. July 2012 at 05:38

    Razer –

    It depends on what you mean by “central economic planner”. All NGDP targeting does is tie the value of the dollar to GDP, just like we tied the value of the dollar to gold at one time. Therefore it is no more central economic planning than the gold standard, or any other monetary system used by the government.

    Every government ultimately has to make a decision on what it will use for money.

  37. Gravatar of Adam Adam
    30. July 2012 at 07:05

    As a non-economist, the first half of this post really gets at something that I don’t understand. And that’s what’s the harm? Let’s say Sumner et al are completely wrong. Let’s hypothesize that targeting expected NGDP can’t work. Let’s test the hypothesis.

    What’s the worst that happens? We get higher-than-current-target inflation for the period of the test? So what?

    Do economist really feel that a year (or whatever) of 4-5% inflation will unhinge the Fed’s ability to keep inflation under check? Why? And for the third who don’t think the Fed can create faster NGDP growth, is there even any conceivable harm?

    Is there some reason not to try the experiment?

  38. Gravatar of Remember when economists were writing books about sumo wrestlers and pirates? « The Market Monetarist Remember when economists were writing books about sumo wrestlers and pirates? « The Market Monetarist
    30. July 2012 at 07:36

    [...] Sumner makes a similar point in one of his latest posts where he argue that if we secure nominal stability then we create a world where Casey Mulligan and [...]

  39. Gravatar of Morgan Warstler Morgan Warstler
    30. July 2012 at 07:46

    “3) The whole problem is that the GIIPS are trying to run deficits without a central bank backstopping them. All the ECB needs to do is “print” some euros and buy GIIPS debt under the Securities Markets Programme (SMP), something it had been doing until late last summer. This will solve the sovereign debt crisis & lower long term rates locally, end the need for fiscal austerity and consequently direct monetary AND fiscal stimulus to the portion of the eurozone in need of aggregate demand right now all in one fell swoop. You don’t have to be a Market Monetarist to think that would be highly effective.

    The eurozone really only has two options: 1) a more expansionary monetary policy with the ECB buying up GIIPS debt through the SMP, or 2) say good bye to the euro. There’s no point in looking for alternative solutions at this point, as they’re totally out of time.”

    Mark you got the whole problem exactly right.

    The solution is the GIIPS not running deficits.

    They KNOW they will bend in the end.

    Because they know they will have to when they drop out of the Euro.

    This is not about debt.

    This is about deficits.

  40. Gravatar of Federico S Federico S
    30. July 2012 at 08:09

    Scott, you wrote: “Well however we define AD, we need to stabilize it”.

    100% agree with you. But the overarching issue here is that economists do not agree how to define AD. So you need to convince economists that AD is NGDPLT. You do not need to convince economists of the benefits of stabilizing AD, as I don’t see economists claiming that we should let AD be volatile.

    The problem is that economists don’t agree on what the stance of monetary policy is (i.e., on how to tell if AD is being stabilized). You’ve pointed this out a number of times, but it’s even a bigger problem than you perhaps make it out to be. If economists agreed on how AD is defined, then AD would likely never be volatile (at least volatile according to their definition of AD). I’m purposefully excluding here the economists who believe that monetary policy can’t control AD.

  41. Gravatar of K K
    30. July 2012 at 08:59

    Scott,

    “K, Perhaps I should have said make dollar bills freely convertible into NGDP futures at a price equal to the policy goal.”

    Well put. Sounds like a policy slogan I could get behind 100%.

  42. Gravatar of Saturos Saturos
    30. July 2012 at 09:24

    Mark, not only that, but Lars Christensen has shown that the ECB has effectively been ignoring its own money supply targets. Why not “maintain credibility” here? Properly speaking monetary policymakers should decide upon their actions without any reference to the fiscal situation – that’s real independence. It’s like a kid saying, “Yah! I won’t be controlled by my parents! I’ll never do anything they tell me too!” Then when the parents make demands the kid proceeds to always do the exact opposite. Of course the kid is still being controlled by his parents, just in reverse.

    Majority Freedom, are you MF’s long-awaited split personality? Because I remember MF refusing to brook that Hayek ever really endorsed NGDP targeting. Not sure what’s going on – self sock-puppet?

    Anyway, if you can’t understand the difference between restraining relative prices between producers, and the general price level faced by all producers, and why one makes sense while the other doesn’t… then we’ve got nothing left to say to you.

  43. Gravatar of Major_Freedom Major_Freedom
    30. July 2012 at 09:44

    Michael:

    “NGDP targeting is not a market process. It is a central planning process.”

    Under this line of thinking, anything the central bank does – including nothing – is central planning.

    If the central bankers do nothing, then they cannot be central bankers. Central banking is characterized by a distinct set of actions that enables us to distinguish between central banking and underwater basket weaving. If central banking actions are not taking place, then central banking is not taking place.

    It’s all well and good to want a currency system that has no central bank, but as long as one exist, its decisions – whether to act or not act, whether to loosen or to tighten, are all central planning.

    Right, except I reject the notion that you or anyone else can know what the central banks should do starting now.

  44. Gravatar of Major_Freedom Major_Freedom
    30. July 2012 at 09:51

    Saturos:

    Majority Freedom, are you MF’s long-awaited split personality? Because I remember MF refusing to brook that Hayek ever really endorsed NGDP targeting. Not sure what’s going on – self sock-puppet?

    Since reading Hayek’s writings, I have always held that he was inconsistent, and I have always held that when Hayek wrote passages favoring a prevention of “secondary deflation”, that he meant it at the world level and not the country level, since it would otherwise be destabilizing in the world’s market.

    I think you misunderstood what I wrote. I never denied that Hayek made the statements he made. They’re in black in white. He said things like “I would do everything I could to prevent a decline in nominal incomes.”

    I just reject the false inference that Sumner is making concerning Hayek, which is founded on ignoring all the rest of what Hayek wrote, as if it doesn’t exist.

  45. Gravatar of StatsGuy StatsGuy
    30. July 2012 at 11:04

    Morgan –

    “It would be the last 30 years with tighter money 71% of the time.”

    What do you mean by tighter money? Do you mean that it was above 5% NGDP? Because if you believe in long term money neutrality, then tighter is entirely in reference to expectations, and if the expectations for inflation have dropped sequentially over the last 3 decades (they have, and a lot) then arguably we have had tight money for 3 decades.

  46. Gravatar of Morgan Warstler Morgan Warstler
    30. July 2012 at 11:27

    StatsGuy,

    under you logic we can expect a lower NGDPLT target!

    There’s no wriggling around it here.

    Sumner’s willing to accept 4.5% NGDPLT (tighter money 78% of the time, with no make up.

    The point is that lots of things actually CHANGE when you add in LT and a target that is historically lower and LOOK BACK AT things, this is what you get:

    If we had we followed 5% NGDPLT in say 2000, and stuck to it, then going forward there isn’t any more 71% of the time.

    WHICH MEANS a very, very different political economy than we have today.

    I can’t stress this enough, getting you people to focus on it is nigh impossible.

    But that LT build up from Congress fighting to keep up deficit spending (which is not RGDP), means a Fed computer that just keep racheting tighter and tighter down until the Govt. simply shrinks.

    It isn’t just off a few % pts etc…

    It is like PEAK OIL in the 1970′s, when you get a 5% reduction in production, and a 4x increase in price.

    Suddenly, no matter what we have to raise rates! 71% of the time!

    And that means wholesale reductions in govt. spending – which forces a whole new thinking about “productivity” in the public sector.

    NGDPLT is a HARD CAP

    And when 71% of the time we would have hit that cap, that means 71% SOMEBODY would have gotten screwed into getting nada.

    Look at this:

    http://www.gallup.com/poll/156347/Americans-Next-President-Prioritize-Jobs-Corruption.aspx

    That’s without a public being given a MONTHLY decision to make on WHO AND WHAT gets the NGDP growth allotted that month.

    What do you think budgets are going to look like, when increased govt. spending MEANS “false” “fake” “unreal” NGDO growth that EATS UP the hard car and makes rates go up?

    It boggles my mind that more people don’t think this through.

  47. Gravatar of ssumner ssumner
    30. July 2012 at 16:56

    Steve, Good point.

    dtoh, By that logic TIPS spreads ought to give a “perfect” indication of inflation expectations. But they clearly don’t.

    Wadolowski, It reduces the debt problem, but doesn’t solve it.

    Adam, I agree.

    Federico, You don’t understand. Most economists don’t want the Fed to stabilize AD, they favor inflation targeting.

    Thanks K.

  48. Gravatar of dtoh dtoh
    30. July 2012 at 21:43

    Scott,
    By that logic TIPS spreads ought to give a “perfect” indication of inflation expectations. But they clearly don’t.

    TIPS principal goes up but never down so they are in effect a fixed income security plus a synthetic inflation option. Accordingly the price reflects a volatility component (inflation risk component for the simple minded)… when volatility rises the price will rise and vice-versa.

    GAINS on the other hand would be a fixed income security plus a futures…. thus no volatility component in the pricing. (Or to be more technical, the investor is both long and short volatility so they cancel out assuming the volatility is symmetric). Also, if price of the GAINS gets out of whack with actual NGDP growth expectations, I can guarantee there are a bunch of smart people on Wall St. who in a heartbeat will strip out the futures component to arbitrage the anomaly and bring the price back in line.

    I have never really looked at TIPs so there may be some other factors involved such as a liquidity premium and some differences in duration and convexity, but these should be easy to estimate.

    Also bear in mind that the Fed can fine tune based on past empirical policy results… and the policy path is a very wide one…it’s not the end of the world if the Fed is off by a few tens of basis on the result.

    Trust me. I know what I’m talking about. There may be minor technical advantages to an actual futures contract, but if you want this happen you ought to be pushing something which is actually saleable.

  49. Gravatar of K K
    31. July 2012 at 16:30

    dtoh: “TIPS principal goes up but never down”

    No. The principal is bounded below at par. But apart from that it can go both up and down with the sign of inflation. New TIPS are generally issued well above par to reduce the option value. To get inflation expectations you just use old TIPS that are trading *way* above par and have no option value.

    “Trust me. I know what I’m talking about.”

    :-)

  50. Gravatar of dtoh dtoh
    31. July 2012 at 17:55

    K,
    Like I said, principal can’t go down. But your points are well taken, and the volatility/option value can be reduced by pricing them above par. I think you will agree though that TIPS can’t be “mispriced.” Any pricing differential (other than for inflation expectations) has to be explained by either a volatility (option) component, duration/convexity, or liquidity. If not, arbitrage will occur to bring pricing into line.

    If you want to structure these things to minimize the non inflation expectation components (or NGDP expectation component in the case of GAINS), then you would want to have only the principal (not coupons) indexed, index it against baseline expectation e.g. 2 or 3% (not 0% inflation), allow the coupons to be stripped (and fungible with normal Treasury securities), and make the indexing a “future” (goes up and down) rather than an option.

    I really don’t know anything about the TIPS market, but it doesn’t surprise me that Treasury is now issuing them above par. That certainly helps to reduce but not eliminate the volatility component in the price. However, it should have been obvious to whoever originally structured these things that they were making the pricing/valuation unnecessarily complicated, which in turn would reduce their liquidity and acceptance in the market.

    It sounds like you understand this stuff so maybe you could work on convincing Scott that he needs to give up his impractical idea of trying to get a pure futures market started.

  51. Gravatar of Skepticlawyer » The misbegotten birth of macro Skepticlawyer » The misbegotten birth of macro
    28. August 2012 at 04:02

    [...] are a matter for monetary policy, but expectations about spending do not or are not still has a depressing hold on perceptions. (See this paper [pdf] {via}, for example, by a former member of the Bank of [...]

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