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.