Inflation?
Skeptics often make two arguments:
1. I shouldn’t talk about NGDP targeting as being the baseline policy. The Fed doesn’t target NGDP; they prefer to allow lower inflation during recessions and higher inflation during booms. That’s just how things work.
2. “Admit it Sumner, you are just advocating inflation. You talk about NGDP targeting, but the bottom line is that you are advocating inflation as a way of reducing unemployment. That policy was tried in the 1960s and 1970s, and rejected.”
Both of these arguments sound plausible, but in fact they conflict with each other. I am not advocating “inflation” as a policy, under any plausible definition of the term. But first let’s get some nonsense out of the way. Words have technical definitions and they have obvious connotations. I hope it’s clear that when people talk about “creating inflation” as a monetary policy, they aren’t talking about a 0.1% per annum rise in the CPI over the next 10 years. If that were the definition, then almost all policymakers, even Richard Fisher, would be inflationists. A more reasonable definition of a policy of “inflation” would be “higher than normal,” or “higher than the Fed’s 2% target.”
I’m going to provide some estimates of what I think would happen with NGDP targeting. Then you can consider whether it is appropriate to call that policy “inflation.” I’d like to use July 2008 as the benchmark. This was 7 months after the peak of the previous boom and unemployment had risen to 5.6%. That’s also the Fed’s estimate of the natural rate of unemployment. Now I’d like to consider a policy of 5% NGDP growth over the next 6 years. Preferably 6% for two years and then 4.5% for the following 4 years. Let’s say that brought unemployment back to 5.6%. One complete cycle, lasting 10 years.
If that occurred, I’d expect about 3.5% RGDP growth and 2.5% inflation for two years, while the economy recovered, and then 2.0% RGDP growth, and 2.5% inflation, over the next 4 years. For simplicity, let’s assume the CPI inflation was also 2.5% per year for the next 6 years. In that case inflation would have averaged 2% over the entire 10 year cycle, and it would have been procyclical, higher during booms than recessions.
Would this represent a policy switch by the Fed? Would it be a break from past policy? I can’t see how anyone could make that claim:
1. During the 10 years prior to July 2008 inflation averaged higher than 2%, despite the fact that the unemployment rate actually rose during that 10 year period. Hence any distortions caused by me cherry-picking dates should have biased the results in the opposite direction.
2. In past business cycles the Fed usually allows higher inflation during booms, whereas inflation tends to fall during recessions, at least after the economy reaches the point where unemployment rises about the natural rate. So the cyclical variation in inflation would also be consistent with previous Fed policy.
This is why I honestly don’t believe that NGDP targeting would be inflationary. In defense of the other side, it appears that US NGDP RGDP growth has permanently slowed from the roughly 3% trend line of the past 100 years. If so, then my original (2009) proposal for 5% NGDP targeting, level targeting, as far as the eye can see would be inflationary relative to the baseline 2% inflation target. That I accept. And I also acknowledge that there are lots of NGDP targeting proposals out there, and some of them would be mildly inflationary, at least in the ordinary sense of the term.
On the other hand I’d argue that any NGDP targeting proposal actually adopted by the Fed would probably be roughly what I proposed above, and hence “non-inflationary,” under any reasonable definition of the term ‘inflation.’ Here’s Boston Fed President Rosengren joining his colleague Charles Evan in calling for NGDP targeting:
Mr. Rosengren said he did not have a firm view on what kind of measuring stick the Fed should use for a new program of asset purchases. But he suggested the Fed could target a minimum rate of nominal growth “” economic growth plus inflation “” of 4.5 percent. The government estimates the rate of nominal growth in the 2012 second quarter at 3.1 percent.
That approach is likely to face resistance from officials including Mr. Bernanke, who has expressed little tolerance for pushing inflation above 2 percent.
Two down, 17 to go. I interpret Rosengren as picking a 4.5% trend because he thinks it would allow for 2% inflation the long run. (I think that’s a bit too optimistic.) And he seems to suggest that slightly higher NGDP growth is needed during the current recovery. I agree.
Now I’d like to slightly extend the argument:
1. If you think the policy Rosengren and I are calling for is inflationary, then you probably don’t understand the nature of the problem.
2. If you view the policy I am calling for as inflationary, you are probably in the majority. Which means that most educated observers don’t understand the nature of the problem. Even worse, this misunderstanding among educated observers is actually one of the causes of our current 8.3% unemployment rate.
A recent quotation from James Hamilton will help me make this point clearer
So why no new stimulus coming out of today’s meeting? If we were talking about the historical operating environment in which the policy decision is whether the Fed should raise or lower the fed funds rate by another 25 basis points, there would be no question– today the Fed would have delivered additional easing.
If the fed funds rate were currently 5.75%, and CPI inflation had averaged 1.2% over 4 years, and was expected to be about the same over the next couple years, and if unemployment were 8.3%, then yes, a Fed rate cut would be expected, and neither John Taylor nor Allan Meltzer nor Richard Fisher would call it “inflationary.” We all agree that the economy needs more stimulus.
So let’s be honest here for a moment. What’s really going on when people call my proposal “inflationary?” I’m not sure, but my guess is that they are falling into the trap of assuming that money is already easy, and hence I’m calling for money to be much easier still. Then they are perhaps subconsciously linking the term ‘inflation’ with “growth in the monetary base.”
Many years ago the term ‘inflation’ was associated with both rising prices and a rising money supply (or a currency depreciating against gold.) Today only a few Austrians still define inflation in terms of growth in the money supply. But if I’m right that no one would call a cut in the fed funds rate from 5.75% to 5.5% during a period of 1.2% inflation and 8.3% unemployment “inflationary”, then I have to assume that this characterization of the policy is not based on the likely rise in the CPI between 2008 and 2018, but rather on some other factor, such as the perceived impact on the monetary base. Ironically they’d be wrong in that assumption as well, because over the medium to long term a more expansionary monetary policy means a much lower ratio of base money to GDP.
PS. I just got back from Arizona, and will start looking at the comments later today. I won’t have time to respond, and indeed plan to take a break from answering comments until the end of 2012. This is because I will be taking some vacation time before school starts, and have several more trips planned. This fall I have a heavier than usual teaching load, and even with a normal teaching load it’s almost impossible to answer all comments. The good news is that if my sabbatical is approved I will not have any courses to teach during calendar 2013. Thus I’ll have lots of time for comments. I will continue to read all comments (with one obvious exception), and will sometimes amend posts to reflect important issues that are raised in the comments. (Probably more often than other bloggers.) Indeed I’ll continue to do new posts based on ideas from the comment section, as I’ve done in the past.
HT: Alexander Hudson.
PS. The title of this post is taken from a little known 1933 book by Irving Fisher.
Tags:
7. August 2012 at 10:18
Scott, at least your back. It should be against the law for you and Krugman to go on vacation the same week!
7. August 2012 at 10:22
“it appears that US NGDP growth has permanently slowed from the roughly 3% trend line of the past 100 years”
Do you mean RGDP here?
7. August 2012 at 10:28
“they are perhaps subconsciously linking the term ‘inflation’ with “growth in the monetary base.”
I think that’s how Austrians define inlfation-literally an increase in the monetary basse.
7. August 2012 at 10:32
Mike Sax,
IIRC, they tend to prefer a broader definition than the monetary base, i.e. the medium of exchange. So that would include demand deposits as well as cash-in-circulation and reserves.
Others, like Hayek, would dismiss the notion of a particular definition of money as being impossible, perhaps due to financial innovation.
7. August 2012 at 10:32
” If you view the policy I am calling for as inflationary, you are probably in the majority.”
If so, I’m in the minority. I defintely don’t think NGDPT would lead to too much inflation whatever it’s vices might turn out to be
7. August 2012 at 10:39
right on. dont apologize for taking a vacation and not answering comments due to ahem, work! your vacation is certainly well-deserved.
7. August 2012 at 10:43
Typo?
” In that case inflation would have averaged 2% over the entire 10 year cycle, and it would have been procyclical, higher during booms than recessions.”
S/B 2.5%, unless you want to change your GDP growth estimates.
7. August 2012 at 10:59
I’m increasingly of the opinion that the real problem with inflation targeting is that inflation is just too hard to boil down into a single number — besides the fact that the concept is multivariate, hedonics are little more than guesswork. I think it’s very, very hard to argue that people aren’t better off in 2012 than 1972 at the same “real” income, and the farther you go back the bigger the problem is which means “inflation” is probably overstated (to the extent applying a single number to trillions of price changes even makes sense at all), and so the tighter-than-apparent monetary policy in turn may partly explain Tyler’s TGS (although I think TGS is mostly due to falling incentives to produce and rising incentives for nonproduction, and next by diminishing low-hanging fruit). Better just to target NGDP!
Best of luck with work and trip.
7. August 2012 at 11:04
I will continue to read all comments (with one obvious exception), and will sometimes amend posts to reflect important issues that are raised in the comments.
Yeah to the shout out. [fist pump]
7. August 2012 at 11:36
A little off topic (but it does include John Taylor), with friends like DeLong, does Barack Obama need enemies;
http://delong.typepad.com/sdj/2012/08/things-wrong-with-hassett-hubbard-mankiw-and-taylor-the-romney-program-for-economic-recovery-growth-and-jobs.html
————-quote————–
[Romney economists] HHMT: We are presently in the most anemic economic recovery in the memory of most Americans, with significant joblessness and long-term unemployment, as well as lost income and savings.
[DeLong] WRONG: We are in the worst downturn, but we are not in the “most anemic” recovery–the recovery of 2001-2004 was more anemic.
———–endquote———–
So, after 3-1/2 years of The One we’re not even out of the ‘downturn’?
7. August 2012 at 11:57
Scott,
Your proposal would be inflationary by your terms if real GDP contracted. Say real GDP contracted 2%, the central bank would then be obligated to deliver 7% inflation under a 5% NGDP target. This is the “unmooring of inflation expectations” that Fed researchers have sighted as the reason they have rejected NGDP targeting.
7. August 2012 at 12:14
“over the medium to long term a more expansionary monetary policy means a much lower ratio of base money to GDP”
Is this because GDP is growing due to the expansionary monetary policy?
7. August 2012 at 12:14
John: sounds right. One merely notes that the “unmooring of income expectations” is apparently just fine.
7. August 2012 at 12:44
Scott, I think I might have an idea about where your critics and you disagree: You are using the Growth theory that underlines the thinking of most NK and monetarist economists. In it, you are thinking of the relationship between inflation and the output gap as something like:
π_t = β * E_t [π_t+1] + κ * y*_t
Where y* is some measure of natural level of output that is relevant for economic welfare. Regardless of the IS relationship in the economy, there are plenty of reasons why if you chose a standard inflation targeting CB which functions using a Taylor rule of the type:
i_t = Ï + φ * Ï€_t + ψ * y*_t + Ï…_t
the fed will be unable to steer the economy to equilibrium employment if the ZLB constraints it from satisfying the Taylor principle. Hence, you suggest that the fed can satisfy the Taylor principle by inducing expectations of stable NGDP growth to the public; you state (correctly as far as I can see) that the policy is not inflationary per se and that a fed which would credibly commit to NGDP targeting would not produce more inflation than what is consistent with its mandate, if the supply side of the economy continues to behave as it always had.
Now, consider the above framework from the eyes of an inflationista, an investor who holds a portfolio that consists of gold (assuming that the price of gold depends strictly on money supply) and TIPS. Portfolio theory and weak EMH imply that any combination of the two would be efficient, hence the investor could have held this combination of assets all her life without suffering a loss (ok, I also assume freedom to borrow at i, but you get the idea). Now plug the philips curve into the taylor rule and solve for real interest rate by separating i into realized inflation and r, a la Fisher. Then you see that:
1. The inflationista is protected against inflation
2. The inflationista cannot target gains in the price of gold because the CB targets inflation and hence the gdp deviation in the Taylor rule only serves as an estimate of expected future output gap
3. The inflationista will make much much more so long as the fed induces deflation.
So as long as the above investor is into maximizing returns on her investments, like most of us are, she can be perfectly reasonable in thinking NGDP targeting is a bad idea. It takes away her alpha. What the inflationista needs, is an as long as possible period of bellow target inflation, ending with a gradual return to equilibrium around the time that her TIPS mature. And you are advocating the exact opposite.
I don’t know if this makes sense. I can think of no other way to justify criticism (2) coming from someone who has finished elementary school and can communicate thoughts into comprehensible English.
7. August 2012 at 17:43
Travis, 1.2% for 4 years and then 2.5% for 6, averages 2%. Thanks for the comments.
7. August 2012 at 18:41
There is a technical definition of “inflation” defined by Selgin, Hayek and others as a non-disequilibrium lroducing money regime, eg a regime where the natural price consequences of superior output at reduced costs is not disturbed by the artifical expansion of the money supply.
That is a technically sound definition of a non-inflationary environment, and one NOT driven by non-scientific policy agendas or non-scientific & pathological bureaucratic or guild norms.
Scott wrote,
“I hope it’s clear that when people talk about “creating inflation” as a monetary policy, they aren’t talking about a 0.1% per annum rise in the CPI over the next 10 years. If that were the definition, then almost all policymakers, even Richard Fisher, would be inflationists. A more reasonable definition of a policy of “inflation” would be “higher than normal,” or “higher than the Fed’s 2% target.””
7. August 2012 at 18:51
Greg it’s a small quibble, but why do you alwasy put the quoted text beneath your answer?
How exactly would you even be able to lable someting “non-disquilibrium inducing?”
7. August 2012 at 18:59
ssumner:
I hope it’s clear that when people talk about “creating inflation” as a monetary policy, they aren’t talking about a 0.1% per annum rise in the CPI over the next 10 years.
Which people? What if 0.1% rise in the CPI over 10 years requires more monetary inflation than previous years?
If that were the definition, then almost all policymakers, even Richard Fisher, would be inflationists.
What’s wrong with that implication? Too hard to stomach? Virtually all policy makers are inflationists. Virtually all policymakers want the central bank to continue in operation. Virtually all policymakers want the central bank to print money.
What if someone said “anti-semitism is hatred or dislike of Jews” in Nazi Germany? Would it make sense to say “this definition is not reasonable, for it would make virtually all policymakers anti-semites!”
Hate to break it to you, but virtually all policymakers are inflationists. It’s one of the major reasons why the state won’t let the market correct, and why the economy is stagnating.
A more reasonable definition of a policy of “inflation” would be “higher than normal,” or “higher than the Fed’s 2% target.”
More reasonable based on what? The status quo? Hate to break it to you, but the status quo is not a reasonable basis.
It is not reasonable to keep changing definitions so as to find a distinguishing characteristic between the beliefs of the day.
Central banks increasing the money supply is inflation. What people do with the additional money will be determined by the subjectively determined marginal utility of money vis a vis goods at the time. If virtually everyone is OK with central banks existing, then virtually everyone is an inflationist. It’s that simple. It is not reasonable to change the definition so that we can say “Inflationists are those who want above 20% inflation. Everyone else are non-inflationists”, or “Pro-murder advocates are those who want above 1% increase in murder per year. Everyone else are non-murder advocates.”
Now I’d like to consider a policy of 5% NGDP growth over the next 6 years. Preferably 6% for two years and then 4.5% for the following 4 years. Let’s say that brought unemployment back to 5.6%. One complete cycle, lasting 10 years
If that occurred, I’d expect about 3.5% RGDP growth and 2.5% inflation for two years, while the economy recovered, and then 2.0% RGDP growth, and 2.5% inflation, over the next 4 years. For simplicity, let’s assume the CPI inflation was also 2.5% per year for the next 6 years. In that case inflation would have averaged 2% over the entire 10 year cycle, and it would have been procyclical, higher during booms than recessions.
…..and then what? Do you honestly think all that inflation will have zero distorting effects on the economy and that it won’t make investors inadvertently dependent on accelerated inflation so as to avoid deflationary correction?
What’s really going on when people call my proposal “inflationary?” I’m not sure, but my guess is that they are falling into the trap of assuming that money is already easy, and hence I’m calling for money to be much easier still. Then they are perhaps subconsciously linking the term ‘inflation’ with “growth in the monetary base.”
Actually, that guess is quite a bit off. People call your proposal “inflationary” because you want the central bank to print more money. It’s that simple.
Many years ago the term ‘inflation’ was associated with both rising prices and a rising money supply (or a currency depreciating against gold.) Today only a few Austrians still define inflation in terms of growth in the money supply. But if I’m right that no one would call a cut in the fed funds rate from 5.75% to 5.5% during a period of 1.2% inflation and 8.3% unemployment “inflationary”
I’d call that inflationary, if the Fed has to increase the money supply (reserves) into the banking system so as to coax the fed funds rate downward from where it otherwise would have been.
then I have to assume that this characterization of the policy is not based on the likely rise in the CPI between 2008 and 2018, but rather on some other factor, such as the perceived impact on the monetary base. Ironically they’d be wrong in that assumption as well, because over the medium to long term a more expansionary monetary policy means a much lower ratio of base money to GDP.
You keep making this bait and switch argument. When I say the Fed’s inflation increases the monetary base, I’m talking the absolute level of the base. I’m not talking about relative size of the base as compared to GDP, yet you keep insinuating that those who say base money increases, can only be talking about the relative size of the base money.
The problem with the way you view the base (relative to GDP) is that you are comparing a stock concept (base money) with a flow concept (GDP). While there is nothing wrong in the abstract mathematical sense in doing that, it isn’t what people like me have in mind when we say that the Fed is increasing the monetary base when it buys treasuries and other securities from the banks at necessarily above free market prices (i.e. prices in the absence of central bank inflation).
——————-
I find it rather amusing that you find your political strategizing leading you into Orwellian tactics of doublespeak. Instead of graciously accepting that yes, your proposal is inflationary, that yes, you are calling for more money printing, that yes, you are calling for higher prices, you instead insist on saying that your advocacy of inflation is not actually inflation.
What’s next, freedom is slavery? War is peace? You see, economists who aren’t political strategists don’t find themselves compelled to play these Orwellian tactics, because they aren’t trying to pull the wool over the eyes of the rabble so as to trick them into supporting them politically. You’re afraid that the rabble will shout “Sumner wants inflation!” and risk your political strategy from not being adopted, due to the evil hawks ignorantly listening to the rabble. If only you could convince the rabble that “Sumner’s proposal is not inflationary!”, then the evil hawks will be compelled to take a closer look at Sumnerian non-inflation inflation.
I am sooooooooo glad that I have not made a lifelong intellectual investment in politics. Political strategists masquerading as economists, who find themselves having to up the ante and double down over time, remind me of religious zealots who have publicly invested their image into a particular viewpoint, then when the inconsistencies and flaws of their ideas are exposed, they are compelled to double down and go step by step closer into la la land.
This is what state infiltration of education has done ladies and gentlemen. It has so corrupted the field of economics that rationalism goes by the board, and rhetoric and hermeneutics spread like the plague.
7. August 2012 at 19:31
Twitter updates:
Noah Smith brings up an old chestnut: https://twitter.com/Noahpinion/status/233021833681719296
Andy Harless says something confusing (to me): https://twitter.com/AndyHarless/status/233033457046007808
And Noah Smith is a monster: https://twitter.com/Noahpinion/status/233030302778400769
(But read the whole thread.)
Hanging out on Twitter really makes one realize how influential Scott has been. And I bet he’s got plenty more influencing to do yet.
7. August 2012 at 19:31
Greg, you write a lot about the correct way to do science. But your approach seems very Ptolemaic. (Endlessly moving the goalposts so that you can never be wrong.) With your definition, you can make a vague claim about disequilibrium whenever it suits you. That’s not science.
Oh, and Scott, great post. I would only add once again that we want more NGDP (spending), not inflation, we’re not necessarily trying to “lower the real interest rate to equilibrium” (if anything, we’re trying to raise the equilibrium rate up to reasonable levels), for a given rise in spending we want less inflation and more increase in output. The problem is with how people are taught to think of inflation as the first concern of monetary macro. But this is wrong, The first concern is money. Money policy determines the size of money flows (spending). The natural target is total spending of money. Then we can talk about how the real economy would respons to a given volume of total money-flow under different circumstances; how much are producers demand constrained (due to prices stuck at disequilibrium), how much would more spending simply push up the numbers on the price tags; whether and why we should freak out if numbers on price tags start rising, etc. (Then again, few people approach the study of economics quite rationally – you might be one of the exceptions.)
If people have an endless propensity to bicker about the word “inflation” whenever it is dropped, I think it does make sense to ban it. Say whatever you want to say concretely, and then explain why we should care. If you’re talking about intertemporal disequilibrium or some such thing, show us the math. (Perhaps the main benefit of math in econ is to keep out Austrians and Marxists who refuse to think rigorously, and thus could not now get away with not doing so.)
7. August 2012 at 19:56
Noah also links to this RBA paper: http://www-ho.rba.gov.au/publications/confs/2005/shin.pdf
7. August 2012 at 20:07
Excellent post by Sumner.
Yes, the left-wing is out to sea; and the right-wing “fighting inflation,” eyeing a gold standard, and brushing off their mustaches, jodhpurs and high-brimmed hats.
Yet I think Market Monetarism is winning this debate….incurable optimism must be good for something….
7. August 2012 at 22:33
Mike Sax:
Scott, at least your back. It should be against the law for you and Krugman to go on vacation the same week!
If only we had a fully manifested democracy. Then you can convince 51% of the voters and “democratically” force Sumner and Krugman to take vacations according to times approved by the state! I hear the Gulags are sunny this time of year.
summner:
I just got back from Arizona, and will start looking at the comments later today. I won’t have time to respond, and indeed plan to take a break from answering comments until the end of 2012. This is because I will be taking some vacation time before school starts, and have several more trips planned. This fall I have a heavier than usual teaching load, and even with a normal teaching load it’s almost impossible to answer all comments. The good news is that if my sabbatical is approved I will not have any courses to teach during calendar 2013. Thus I’ll have lots of time for comments. I will continue to read all comments (with one obvious exception), and will sometimes amend posts to reflect important issues that are raised in the comments. (Probably more often than other bloggers.) Indeed I’ll continue to do new posts based on ideas from the comment section, as I’ve done in the past.
That’s pretty confident. It took me about 4-5 years of intense reflection and study to unlearn all the crap I was indoctrinated with in school. But then again, I had fewer years to undue, so…
8. August 2012 at 00:44
Lorenzo,
I think the problem as the mainstream people see it with “unmooring inflation expectations” is that inflation then becomes very difficult to bring back down; often requiring pretty severe recessions to do so. The Fed worked hard to bring inflation down to the 2% area over the last 30 years and they aren’t going to adopt a policy that risks losing those gains.
8. August 2012 at 00:48
I am one of those who would make argument 2 (never argument 1, which seems to me to rule out changing anything). But that is not because I think NGDP targeting regimes are inherently inflationary (especially if there is some independent assessment of potential RGDP growth). It is the immediate impact of NGDP targeting that worries me.
Monetary authorities in indebted countries are looking for an escape route from inflation targets that increasingly bind them from responding to pleas for “help” (not least since many – Benjamin Cole – seem to have got the idea that central banks have a bottomless pit of resources that they only hold back because they are disciplinarians). The monetary authorities will seize on NGDP targeting for the relief it gives them now, and subvert it when it mandates restraint – as you point out, the Fed seems to find it hard to hold inflation down during booms, when if anything it ought to be easier to do so.
I have seen several monetary policy frameworks tried in the UK in my lifetime, and all were subverted or abandoned in less than the ten year horizon that you discuss. As I keep saying, if you want to do good, rather than have the satisfaction of seeing your policy proposals taken up, you should err on the conservative side with the NGDP target.
8. August 2012 at 04:44
Scott,
I enjoy your writings and applaud you for the sincerity with which you promote and defend your position.
I think your position is naive at best and deceptive at worst.
The inherent flaw in your theory is the presumption that any body of experts can know the right price of money. I do not doubt the experts can get the price right once in a while. I know they can not get it right consistently. It is the errors in pricing that invariably occur that cause great harm.
Do you believe that Fed policy failed in the summer of 2008? Why did it fail? Did the Fed intend to cause great economic ruin? Or did their algorithms tell them to tighten money at the same time the economy was contracting? Either way they goofed.
You believe in a Fed that will not goof. Obviously you cannot believe central bankers are infallible. Thus, you advance the idea that the key to successful banking is the right algorithm – and you, as a good economist, know what it is.
I do not doubt there is merit to your theory. But I have tremendous doubt that its implementation can succeed. Do you really think the politicians are going to graciously allow for 5% growth of the money supply the same time food & energy prices are climbing at a 10% annual rate?
You and Krugman can argue forever that price spikes in food & energy are not necessarily inflation. The bourgeois doesn’t care about the definition. They just care that food & energy prices are killing their pocketbook.
Even the best central bank algorithm is subservient to the whims of politics. To ignore this reality is to admit your ideas are nothing more than ivory tower musings.
8. August 2012 at 06:52
[Full Employment Hawk] CORRECT: We are recovering from the worst downturn since the Great Depression, but we are not in the “most anemic” recovery-the recovery of 2001-2004 was more anemic.
8. August 2012 at 07:07
“The inherent flaw in your theory is the presumption that any body of experts can know the right price of money.”
Actually that is the inherent flaw in inflation targeting. Targeting the rate of inflation at X percent makes the implicit assumption that in the next period 1 / (the current price level plus X% of the current price level) will be the correct price of money.
Under NGDP targeting the price of money next period depends on the growth in real GDP during the current period. Therefore there is no ONE correct price of money.
8. August 2012 at 07:14
“Mitt Romney says more Fed stimulus is not the answer to economic woes”
It therefore follows that people who are serious about market monetarism should oppose Romney.
8. August 2012 at 07:22
“you are advocating inflation as a way of reducing unemployment. That policy was tried in the 1960s and 1970s, and rejected.”
The economy was never in a depression during this period, so the policy of using inflation during a depression to bring the unemployment down was not tried then. It was tried in the early 1930s by Roosevelt and was spectacularly succeessful in the following years.
A variant of the policy was tried during the Reagan recession. The Fed took its foot off the monetary brakes while the economy still had about 4% inflation, rather than brining it down to 2%. This permitted the unemployment rate to come down in time to get Reagan reelected.
8. August 2012 at 07:44
Hey guys totally off topic here, but I actually found in my one dollar bills a seemingly real silver certificate for one dollar from 1957 (Series B) Its for one dollar in silver on demand. What do you think I should do with it? (Scott, anyone?) I tried taking it to my local bank but they said (while staring at it in slack jawed wonder) that they don’t do those types of conversions. Should I take it to the Federal Reserve Bank of Chicago?
8. August 2012 at 07:56
Scott, good you have been on vacation – as a consequence you missed all the “fun” with Art Laffer. That is probably could in terms of controlling your blood pressure…
8. August 2012 at 08:12
Full Unemployment Hawk:
“The inherent flaw in your theory is the presumption that any body of experts can know the right price of money.”
Actually that is the inherent flaw in inflation targeting. Targeting the rate of inflation at X percent makes the implicit assumption that in the next period 1 / (the current price level plus X% of the current price level) will be the correct price of money.
Under NGDP targeting the price of money next period depends on the growth in real GDP during the current period. Therefore there is no ONE correct price of money
This is just denial. NGDP targeting also contains the presumption that a body of experts can know the right price of money. By targeting NGDP, the body of experts are effectively saying “We know that the right price of money is equal to the difference (NGDP – RGDP).” The market is not in charge of RGDP, because RGDP would just be a past NGDP. Even if the market DID decide RGDP, then by your logic even inflation targeting would contain the “presumption”, on the basis that the market “decides” money holding.
Under NGDP targeting, the Fed would be positively setting the rate of inflation (and aggregate demand). The market would not be setting the rate of inflation just because they are in charge of real GDP, actual real GDP. For the Fed is still targeting NGDP! If the market were in charge of NGDP, and M, then and only then could you say that there is no body of experts presuming themselves to have knowledge of the right price of money.
Now, it also not the case that the presumption does not exist with NGDP targeting on the basis that there would be no ONE inflation rate. The Fed would be setting the inflation rate whatever it happens to be according to NGDP – RGDP. That difference IS a presumption by a body of experts who presume to know the right price of money at any given time, namely, that the right price of money is “NGDP – RGDP”.
———————-
Now that the logic of your position when correctly used in deduction leads one to concluding that NGDP targeting has the same inherent flaw as inflation rate targeting, are you going to continue to advocate for it? You’d be advocating that a body of experts can know the right money supply, the right aggregate spending, the right price of money, etc.
8. August 2012 at 08:52
‘[Full Employment Hawk] CORRECT: We are recovering from the worst downturn since the Great Depression, but we are not in the “most anemic” recovery-the recovery of 2001-2004 was more anemic.’
Not even true if that is what DeLong was trying to say;
http://data.bls.gov/timeseries/LNS14000000
Note that in July of 2004 the unemployment rate (5.5%) had declined from a year earlier (6.2%) by over 12%.
This July, the last month in the BLS chart, it was 8.3% which is only lower than a year ago (9.1%) by about 9%.
8. August 2012 at 08:57
Btw, the recovery of 2001-2004 isn’t even ‘more anemic’ than that of 1991-1994. And DeLong knows it, because I (and Jim Glass) pointed it out, back then, to him.
I can’t do that now, because he won’t allow it.
8. August 2012 at 09:02
“We know that the right price of money is equal to the difference (NGDP – RGDP).”
Now you’re just grasping for straws. If the government decided that the price of money should be wholly determined by the market (under free banking, a forced gold standard outlawing competing currencies is NOT a market), that presupposes that the body of experts who make this decision know that the right price of money is whatever is determined by the market.
8. August 2012 at 09:05
Also, the Oracle of Berkeley doesn’t seem to understand that correlation isn’t causation;
http://delong.typepad.com/sdj/2012/08/fix-spending-on-residential-construction-and-you-will-have-fixed-the-downturn.html
‘FIX SPENDING ON RESIDENTIAL CONSTRUCTION, AND YOU WILL HAVE FIXED THE DOWNTURN
‘That is all.’
8. August 2012 at 09:06
‘If the government decided that the price of money should be wholly determined by the market….’
It is so decided…every day.
8. August 2012 at 09:09
Patrick, it’s decided by the market + government since government sets the supply.
8. August 2012 at 10:02
Another recruit:
http://www.aei-ideas.org/2012/08/fed-study-says-bush-and-banks-didnt-cause-the-great-recession-the-fed-did/
8. August 2012 at 10:10
From the FT – Do what Roosevelt did – buy gold.
http://ftalphaville.ft.com/blog/2012/08/07/1109781/gold-qe/
8. August 2012 at 10:53
Patrick Sullivan:
‘If the government decided that the price of money should be wholly determined by the market….’
It is so decided…every day.
No it isn’t, because the non-market central bank is changing the money supply on a daily basis, and the supply of money is a component in the price of money.
8. August 2012 at 12:24
“If the government decided that the price of money should be wholly determined by the market, … that presupposes that the body of experts who make this decision know that the right price of money is whatever is determined by the market.”
And this body of experts would be getting it wrong because in an economy where market power, asymmentric information, missing markets, and externalities are the rule, the price of money determined by the market is highly unlikely to be the right price. More specifically, when an economy is in a depression, so that transactions take place when markets do not clear, the price of money determined by the market is definitely not the right price, since a neccessary (but not sufficient) requirement for the right price is that all markets are continuously clearing at that right price.
8. August 2012 at 13:02
Brito:
If the government decided that the price of money should be wholly determined by the market (under free banking, a forced gold standard outlawing competing currencies is NOT a market), that presupposes that the body of experts who make this decision know that the right price of money is whatever is determined by the market.
That is just absurd. The market process doesn’t require any sanction or planning from any body of experts to enable myself or anyone else to know that the market process determined price of money is the right price of money.
It doesn’t matter if the body of experts conclude that the market process determined price of money is the right price of money or the wrong price of money. These are subjective opinions, and to the extent they are not in violation of property rights, they are a PART of the market process itself. The market process itself is not controlled by any one person. The validity of the process revealing the right price of money doesn’t rest on the sanction of any one person.
To say that the free market process determined price of money rests on the sanction of a body of experts, is to completely contradict the very nature of the free market process itself.
It’s you, me, and every other individual producing and trading money in a context of respect for private property. Each person’s subjective desires and actions in this context will determine the “objective” data that constitutes the meaning of the price of money.
8. August 2012 at 13:15
Full Unemployment Hawk:
And this body of experts would be getting it wrong because in an economy where market power, asymmentric information, missing markets, and externalities are the rule, the price of money determined by the market is highly unlikely to be the right price.
The free market process CONTAINS market power, asymmetric information, missing markets, but not externalities.
It is silly to use an impossible standard to judge the real world market, and then believe that to the extent the real world market does not resemble this impossible standard, that the state is therefore justified in stepping in and setting a “better” price of money that is “closer” to the impossible standard.
Not only is your argument based on a fallacious foundation, which is bad enough, but it is also self-contradictory, since the state itself introduces actual power (real power which is based on physical force, not the false power of being a wealthy producer), asymmetric information (think CIA and NSA and other secrecy in government), missing markets (when the state taxes and regulates, it means market trades that could have been made, are destroyed), and externalities (If Peter threatens to rob from Paul, the state takes money from everyone else, and thus externalizes the costs on everyone else, to finance the protection of Paul).
More specifically, when an economy is in a depression, so that transactions take place when markets do not clear, the price of money determined by the market is definitely not the right price, since a neccessary (but not sufficient) requirement for the right price is that all markets are continuously clearing at that right price.
False. That is not the right price. That is an artificial price consistent with the same impossible standard of “pure and perfect competition”.
Markets do clear, just not instantaneously. Instantaneous clearing is yet another absurd standard that non-praxeologist economists who work with static equations and concepts assume is market “perfect”. But humans act through time. Choices and actions are made sequentially, not simultaneously.
The reason why your mind is deviating towards state control is because you live in a dynamic world and you don’t understand how the market process works in such a dynamic world. You have “perfect” conceptualizations of static concepts in your mind, and because the real world is never static, it is somehow “tainted”, “degraded”, and “imperfect”. Only a “strong” power can allegedly lead an otherwise chaotic and incomprehensible world towards “stability”.
If your mind thinks in terms of static concepts, rather than dynamic concepts, then you will always fail to grasp how the real market works and what is “optimal”. Optimality is not rigidity. Optimality is adaptation, innovation, change, learning, all the things that are categories of ACTION!
8. August 2012 at 13:18
‘…the non-market central bank is changing the money supply on a daily basis, and the supply of money is a component in the price of money.’
In order to price something there has to be that something.
8. August 2012 at 13:24
“That is just absurd. The market process doesn’t require any sanction or planning from any body of experts to enable myself or anyone else to know that the market process determined price of money is the right price of money.”
There is no a priori reason to believe that the price of money determined by the market, if left to its own devices, is the right price.
The conclusion that the price of money determined by the market is indeed the right price is the result of a body of experts (or at least alleged experts, like the Austrians) concluding that the market, if left on its own, always gets things right. In my posting above, I explain why these alleged experts get things badly wrong.
8. August 2012 at 13:37
“If your mind thinks in terms of static concepts, rather than dynamic concepts,”
No, I think in terms of dynamic concepts. I just don’t think like Austrians. That is a good thing.
8. August 2012 at 13:50
“If your mind thinks in terms of static concepts, rather than dynamic concepts,”
No, I think in terms of dynamic concepts. For example, one of the main reasons for my rejection of the New Classical Economics is that it assumes that prices change unstantaneously and together, rather than allowing for the reality that prices change gradually and sequentially. I just don’t think like Austrians. That is a good thing.
“Markets do clear, just not instantaneously.”
Yes, in the long run they do clear. But in the long run we are all dead. Markets can fail to clear for extended periods of time, as is currently the case. During such times policies that offset or correct for this failure are needed.
For example, if the economy is depressed, rather than waiting for the economy to work its own way out of the depression, which can take years, monetary stimulus to end the depression is needed. Controlling NGDP growth at a high enough rate is the best practical way of achieving this.
8. August 2012 at 15:00
If the fed funds rate were currently 5.75%, and CPI inflation had averaged 1.2% over 4 years, and was expected to be about the same over the next couple years, and if unemployment were 8.3%, then yes, a Fed rate cut would be expected, and neither John Taylor nor Allan Meltzer nor Richard Fisher would call it “inflationary.” We all agree that the economy needs more stimulus.
So let’s be honest here for a moment. What’s really going on when people call my proposal “inflationary?” I’m not sure, but my guess is that they are falling into the trap of assuming that money is already easy, and hence I’m calling for money to be much easier still…
~~~~~
Yahoo Finance:
Fed’s Fisher: Just Stop With the Easing
Richard Fisher, the president of the Federal Reserve Bank of Dallas, says it’s time for policy makers to get out of the way, not to throw more money at the economy, directly countering the comments one of his central bank colleagues offered earlier this week.
“I believe we have done our job,” he said during an interview on Bloomberg TV, reiterating a position he’s expressed previously. “We have done enough. Just doing more doesn’t solve the problem. The problem is engaging the transmission.”
Fisher’s remarks came a day after his counterpart in charge of the Boston Fed, Eric Rosengren, said the Fed has to buy bonds until the economy starts growing at a better clip and the unemployment rate comes down.
But Fisher, who’s known for being more hawkish, that is, concerned about driving up inflation with too much monetary easing (see the below Daily Ticker video from May), says that’s not the approach.
“We provided the gas,” he said on Bloomberg TV. “The gas tank is full … who’s going to incent the driver of this economy to step on the accelerator and move it forward? [T]hat’s the private sector.”…
9. August 2012 at 02:56
“I believe we have done our job,”
This belief is most appropriately characterized as a serious delusion. The Fed’s job is to provide for maximum employment. An unemployment rate stuch at over 8% is in no way maximum employment.
“We provided the gas,”
He is thinking like a traditional monetarist who thinks that M is the gas. Market monetarism has, however, shown that it is M x V that is the gas. And the Fed has not provided the gas. NGDP growth is at a level similar to the Great Depression.
9. August 2012 at 20:01
[…] Source […]
10. August 2012 at 18:56
Scott …I have read this bit about ten times now…and something bugs me.
It is that last line that I bolded that gets me. It seems to me that what you describe is not PRO, but Countercyclical.
If this was a prescription for fiscal stim instead of monetary stim it would sound Keynesian to everyone. It does sound Keynesian to me.
(OK, I will just substitute “Fiscal” for NGDP…I am not saying the numbers make sense. )
That is priming the pump when the economy is down and then backing off after growth is achieved…Right ? Countercyclical.
Am I missing something ? What am I missing ?
10. August 2012 at 18:58
I did not mean to shout the whole last part of my post…I forgot to / the bold .
Sorry