Stable NGDP growth is a public good

We (almost) all benefit from low and stable NGDP growth.  But at an individual level we have no incentive to behave in such a way as to produce low and stable NGDP growth.  It’s a public good.

Tyler Cowen recently pointed out (correctly) that if we hold the money supply constant, the private sector could manufacture more NGDP growth by acting in such a way as to boost velocity.  That’s true.  Whether it would actually work depends on how the Fed responds to a rise in velocity.  That’s much more debatable, but I’m willing to entertain Tyler’s claim that we are in a place right now where expected NGDP growth is a bit less than the Fed would prefer.  (Obviously if true that would also imply a role for fiscal stimulus.)

But I’d like to put aside the monetary offset issue and focus on the public good problem.  It’s also true that it’s theoretically possible for everyone in the world to behave as if they are utilitarians, which (if they believe in global warming) would lead them to pretend that there is a carbon tax in effect, and base their consumption and production decisions on that assumption.  We typically assume that people are not that altruistic, which is why most economists favor a carbon tax.  (I am pretty sure that Tyler does as well.)  If we have a NGDP problem, the private sector could solve it by manufacturing more NGDP.  But they’d have no incentive to do so.

Clearly Tyler is aware of this public good problem, so he might be thinking about non-monetary policies that would encourage faster velocity, overcoming the public good problem.  The easiest way to solve the NGDP public good problem is to print more money (or even better, have the Fed boost V by setting a higher NGDP target.)  But there are other ways.  You could do fiscal stimulus.  You could replace the corporate income tax with a higher payroll tax on upper incomes, which would encourage more investment and boost V.  You could reduce burdensome regulations.

But these other ways of boosting (or “manufacturing”) NGDP are completely unrelated to the sticky-wage issue.  Perhaps I misread Tyler, but he seems to suggest that even if we need more NGDP, we might be better off thinking in terms of a lack of privately manufactured NGDP, not tight money.  But if (as Tyler seems to suggest) wage stickiness is not the problem right now, then having more NGDP wouldn’t help at all.  Rather we’d need supply-side policies that boosted RGDP, for any given level of NGDP.  So I find a puzzling “mixed message” in a post that talks about how the private sector can manufacture NGDP, and also expresses skepticism about the sticky-wage problem.

I may well have misread Tyler’s argument, so let me suggest how I would have re-framed the argument I think he was making:

1.  Suppose that the economy was subject to real shocks.

2.  Suppose nominal shocks had no real effects.

3.  Suppose the Fed successfully targeted inflation at 2%.

In that case movements in NGDP and RGDP would be perfectly correlated, even though there was no causal relation running from NGDP to RGDP.  NGDP shocks would not be as important as they seem, and sticky wages would not be the problem.

For quite some time I’ve suspected that my success in promoting NGDP targeting was partly undeserved.  The famous L-shaped NGDP graph for the last 10 years is a very powerful visual persuader.  Maybe too powerful.  So you might ask why I believe NGDP is so important, given that assumptions 1 through 3 make the hypothesis highly questionable.  Here’s why:

1.  During periods when the Fed wasn’t targeting inflation, we had lots of natural experiments with wild and crazy monetary shocks.  They seemed to have real effects.

2.  I put a lot of weight on the stylized fact that wages and prices are sticky, which means nominal shocks should have real effects (on theoretical grounds.)

3.  Asset markets behave in a way that seems consistent with the view that investors currently believe the real problem is (partly) nominal.  Equity investors presumably favor monetary stimulus right now because they (correctly) believe that wages are pretty sticky right now.

Tyler agrees with me on some of this, which is why he’s argued in the past that while monetary stimulus is not a panacea, it’s worth shooting for at least a bit higher NGDP growth.  We differ on the relative importance of real and nominal factors, and how long it takes for wages to adjust.

PS.  The private sector can also “manufacture” lower NGDP, if the Fed is passive.  For instance if the Fed had been passive (in terms of the monetary base) after the Soviet bloc broke up, then it’s very possible that the hoarding of dollars in that region would have led to a Great Depression in the US, comparable to the 1930s.

PPS.  I agree with David Beckworth and George Selgin that NGDP is a 100% nominal variable.  NGDP is “the real thing,” whereas P and Y are simply data points pulled out of the air by Washington bureaucrats.  There’s no good theory to back up their efforts, as it’s not even clear what “inflation” is supposed to measure.  (Suppose a $25,000 2012 Camry is just as good as a $25,000 Rolls-Royce sold in 1948.  Does that mean there has been no nominal increase in car prices since 1948?  What does “car price inflation” mean?) Tyler may have had in mind something like my example where despite the fact that NGDP and RGDP are highly correlated, there is no causal relationship.

PPPS.  Commenters sometimes tell me that real world businessmen don’t care about NGDP.  In fact they care a lot.  I’m sure GM execs often sit around a table discussing how “the economy” will be next year, which actually means “how much consumers in aggregate will spend (in nominal terms) on cars next year.”  The execs already know pretty much what it will cost to manufacture cars next year, even in nominal terms.  So expected nominal spending on cars in 2013 is extremely important to GM execs when thinking about how much to invest in expanding their facilities.  Undoubtedly they break the forecasts down into unit sales and average prices, but both of those variables are very important to them.


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40 Responses to “Stable NGDP growth is a public good”

  1. Gravatar of Morgan Warstler Morgan Warstler
    26. September 2012 at 16:24

    Money and Monetary Policy are not public goods, but no matter.

    What does matter is that Scott will not answer this:

    1. If NGDPLT has to have make-up to work, WHY is it so great?

    2. If it doesn’t need make-up to work, how does the recovery happen?

  2. Gravatar of Tyler Cowen Tyler Cowen
    26. September 2012 at 17:20

    The important substantive issue is this: “Tyler agrees with me on some of this, which is why he’s argued in the past that while monetary stimulus is not a panacea, it’s worth shooting for at least a bit higher NGDP growth. We differ on the relative importance of real and nominal factors, and how long it takes for wages to adjust.” And we both agree on that description.

  3. Gravatar of Kevin Dick Kevin Dick
    26. September 2012 at 18:00

    @Tyler and Scott

    I’d be interested in your respective quantitative estimates of nominal vs real importance. If Tyler is 10-90 for real and Scott is 90-10 for nominal, that’s not much agreement. But if Tyler is 50-50 and Scott is 75-25, there’s a pretty wide range of actions that you should both be ready to support.

  4. Gravatar of Morgan Warstler Morgan Warstler
    26. September 2012 at 18:10

    +1 for Kevin

    and…

    1. If NGDPLT has to have make-up to work, WHY is it so great?

    2. If it doesn’t need make-up to work, how does the recovery happen?

  5. Gravatar of Major_Freedom Major_Freedom
    26. September 2012 at 19:57

    ssumner:

    We (almost) all benefit from low and stable NGDP growth.  But at an individual level we have no incentive to behave in such a way as to produce low and stable NGDP growth.

    Actually, almost everyone loses from inflation. Inflation:

    – reduces the purchasing power of the incomes of those who receive the new money after the initial receivers, in a diminishing fashion (those who receive the new money second lose only a little bit, those who receive it third lose a little more, and so on, until we consider those who receive the new money last, who lose the most). These losses cannot be considered gains. Saying that NGDP targeting is better than X targeting does not imply that X is an outright gain,

    – affects relative prices and spending away from actual preferences of all market participants and generates unsustainable capital configurations, which we observe as the business cycle.

    – it has the long run effect of accelerating the rate of growth in the money supply, which is not sustainable.

    – it exacerbates wage and price stickiness by conditioning wage earners and others to expect price increases.

    – to the extent that inflation takes the form of credit expansion, it introduces a shaky foundation that makes the economy one that is built on a house of cards.

    It’s a public good.

    There is no such thing as a public good. Public goods are a fiction of central planner’s imaginations, designed specifically to serve as an intellectual justification for naked aggression of the state. It’s tactic consists of a denial that economic laws apply to certain goods not valued by individuals with economic freedom, so as to cast doubt on the free market process from being considered the optimal method in producing and offering such goods.

    Since the market process of producng goods consists of both approving AND rejecting various investing and production proposals, the central planners swoop in and claim that because their anti-market desires are in the rejection category, they interpret this as a flaw in the market process itself, rather than as a flaw in their own desires, and so seek a person or group of people willing to violate other people’s economic freedom with coercive threats of violence, so as to bring about the production and delivery of their preferred goods. They call these “goods” “public goods” rather than “preferred goods of coercive criminals in group X who exploit those not in group X”, for obvious reasons. The word “public” is a euphemism for “get ready, because violence is coming our way if you dare resist what we intend to do with your property.”

    But I’d like to put aside the monetary offset issue and focus on the public good problem.  It’s also true that it’s theoretically possible for everyone in the world to behave as if they are utilitarians, which (if they believe in global warming) would lead them to pretend that there is a carbon tax in effect, and base their consumption and production decisions on that assumption.  We typically assume that people are not that altruistic, which is why most economists favor a carbon tax.  (I am pretty sure that Tyler does as well.)  If we have a NGDP problem, the private sector could solve it by manufacturing more NGDP.  But they’d have no incentive to do so.

    If you want to save the world from being incinerated in a carbon based fire due to the absence of strong central planners who know what’s best for everyone, then you should support NGDP targeting. If you don’t, then your behavior is akin to being a global warming denier, perhaps even a holocaust denier.

    PS.  The private sector can also “manufacture” lower NGDP, if the Fed is passive.  For instance if the Fed had been passive (in terms of the monetary base) after the Soviet bloc broke up, then it’s very possible that the hoarding of dollars in that region would have led to a Great Depression in the US, comparable to the 1930s.

    Not if individuals were legally free to create and buy/sell their own currencies, without owing US dollar taxes on whatever incomes they earn. Private sector manufacturing of NGDP should not mean “A select group of private money issuers with government enforced monopoly privileges”. It should mean economic freedom of ANY private sector individual to produce the good in question. It is this twisting and redefining of words (conveniently in the direction of more government power) that is partly responsible for the growth of government and the forgetting of the true meaning of free market capitalism. Even self-professed free market economists are advocating for things that would have made men like Bastiat, Turgot, and Mises facepalm.

    PPS.  I agree with David Beckworth and George Selgin that NGDP is a 100% nominal variable.  NGDP is “the real thing,” whereas P and Y are simply data points pulled out of the air by Washington bureaucrats.  There’s no good theory to back up their efforts, as it’s not even clear what “inflation” is supposed to measure.  (Suppose a $25,000 2012 Camry is just as good as a $25,000 Rolls-Royce sold in 1948.  Does that mean there has been no nominal increase in car prices since 1948?  What does “car price inflation” mean?) Tyler may have had in mind something like my example where despite the fact that NGDP and RGDP are highly correlated, there is no causal relationship.

    Then why are you constantly saying you chose 5% NGDP on the basis of 2% price inflation and 3% real growth? That is P and Y. If they are pulled out of the air, then NGDP targeting is doubly pulled out of thin air. One, because 5% is pulled out of the air, and two, because the thing pulled out of the air is itself based on adding two numbers pulled put of the air.

    Actually, it’s at least triple pulled out of the air. The justification for the naked violence that backs up the entire inflationary system under which NGDP targeting is based, is pulled out of thin air.

    It’s like watching one airhead say to another that the other’s ideas are pulled out of thin air. He’s technically right, but he isn’t exactly non-hypocritical.

    PPPS.  Commenters sometimes tell me that real world businessmen don’t care about NGDP.  In fact they care a lot.  I’m sure GM execs often sit around a table discussing how “the economy” will be next year, which actually means “how much consumers in aggregate will spend (in nominal terms) on cars next year.”

    GM execs do not consider NGDP, and no, it is not justified to argue that whatever aggregate kind of economic picture they are talking about, it’s all “really about NGDP”. it is not justified because it is not unique to NGDP. Any central plan that targets some aggregate dollar based statistic could be so justified. One could say “Oh, aggregate price level targeting? Of course GM execs talk about it. Maybe not directly, but when they talk about “the economy”, that’s what they really have in mind, because after all, price level indexes supposedly tell us the health of the

     The execs already know pretty much what it will cost to manufacture cars next year, even in nominal terms.  So expected nominal spending on cars in 2013 is extremely important to GM execs when thinking about how much to invest in expanding their facilities.  Undoubtedly they break the forecasts down into unit sales and average prices, but both of those variables are very important to them.

  6. Gravatar of Major_Freedom Major_Freedom
    26. September 2012 at 20:37

    ssumner:

    We (almost) all benefit from low and stable NGDP growth.  But at an individual level we have no incentive to behave in such a way as to produce low and stable NGDP growth.

    Actually, almost everyone loses from inflation. Inflation:

    – reduces the purchasing power of the incomes of those who receive the new money after the initial receivers, in a diminishing fashion (those who receive the new money second lose only a little bit, those who receive it third lose a little more, and so on, until we consider those who receive the new money last, who lose the most). These losses cannot be considered gains. Saying that NGDP targeting is better than X targeting does not imply that X is an outright gain,

    – affects relative prices and spending away from actual preferences of all market participants and generates unsustainable capital configurations, which we observe as the business cycle.

    – it has the long run effect of accelerating the rate of growth in the money supply, which is not sustainable.

    – it exacerbates wage and price stickiness by conditioning wage earners and others to expect price increases.

    – to the extent that inflation takes the form of credit expansion, it introduces a shaky foundation that makes the economy one that is built on a house of cards.

  7. Gravatar of Major_Freedom Major_Freedom
    26. September 2012 at 20:38

    Oops, I sent the post prematurely. I HATE ipads!

    ssumner:

    It’s a public good.

    There is no such thing as a public good. Public goods are a fiction of central planner’s imaginations, designed specifically to serve as an intellectual justification for naked aggression of the state. It’s tactic consists of a denial that economic laws apply to certain goods not valued by individuals with economic freedom, so as to cast doubt on the free market process from being considered the optimal method in producing and offering such goods.

    Since the market process of producng goods consists of both approving AND rejecting various investing and production proposals, the central planners swoop in and claim that because their anti-market desires are in the rejection category, they interpret this as a flaw in the market process itself, rather than as a flaw in their own desires, and so seek a person or group of people willing to violate other people’s economic freedom with coercive threats of violence, so as to bring about the production and delivery of their preferred goods. They call these “goods” “public goods” rather than “preferred goods of coercive criminals in group X who exploit those not in group X”, for obvious reasons. The word “public” is a euphemism for “get ready, because violence is coming our way if you dare resist what we intend to do with your property.”

    But I’d like to put aside the monetary offset issue and focus on the public good problem.  It’s also true that it’s theoretically possible for everyone in the world to behave as if they are utilitarians, which (if they believe in global warming) would lead them to pretend that there is a carbon tax in effect, and base their consumption and production decisions on that assumption.  We typically assume that people are not that altruistic, which is why most economists favor a carbon tax.  (I am pretty sure that Tyler does as well.)  If we have a NGDP problem, the private sector could solve it by manufacturing more NGDP.  But they’d have no incentive to do so.

    If you want to save the world from being incinerated in a carbon based fire due to the absence of strong central planners who know what’s best for everyone, then you should support NGDP targeting. If you don’t, then your behavior is akin to being a global warming denier, perhaps even a holocaust denier.

    PS.  The private sector can also “manufacture” lower NGDP, if the Fed is passive.  For instance if the Fed had been passive (in terms of the monetary base) after the Soviet bloc broke up, then it’s very possible that the hoarding of dollars in that region would have led to a Great Depression in the US, comparable to the 1930s.

    Not if individuals were legally free to create and buy/sell their own currencies, without owing US dollar taxes on whatever incomes they earn. Private sector manufacturing of NGDP should not mean “A select group of private money issuers with government enforced monopoly privileges”. It should mean economic freedom of ANY private sector individual to produce the good in question. It is this twisting and redefining of words (conveniently in the direction of more government power) that is partly responsible for the growth of government and the forgetting of the true meaning of free market capitalism. Even self-professed free market economists are advocating for things that would have made men like Bastiat, Turgot, and Mises facepalm.

    PPS.  I agree with David Beckworth and George Selgin that NGDP is a 100% nominal variable.  NGDP is “the real thing,” whereas P and Y are simply data points pulled out of the air by Washington bureaucrats.  There’s no good theory to back up their efforts, as it’s not even clear what “inflation” is supposed to measure.  (Suppose a $25,000 2012 Camry is just as good as a $25,000 Rolls-Royce sold in 1948.  Does that mean there has been no nominal increase in car prices since 1948?  What does “car price inflation” mean?) Tyler may have had in mind something like my example where despite the fact that NGDP and RGDP are highly correlated, there is no causal relationship.

    Then why are you constantly saying you chose 5% NGDP on the basis of 2% price inflation and 3% real growth? That is P and Y. If they are pulled out of the air, then NGDP targeting is doubly pulled out of thin air. One, because 5% is pulled out of the air, and two, because the thing pulled out of the air is itself based on adding two numbers pulled put of the air.

    Actually, it’s at least triple pulled out of the air. The justification for the naked violence that backs up the entire inflationary system under which NGDP targeting is based, is pulled out of thin air.

    It’s like watching one airhead say to another that the other’s ideas are pulled out of thin air. He’s technically right, but he isn’t exactly non-hypocritical.

    PPPS.  Commenters sometimes tell me that real world businessmen don’t care about NGDP.  In fact they care a lot.  I’m sure GM execs often sit around a table discussing how “the economy” will be next year, which actually means “how much consumers in aggregate will spend (in nominal terms) on cars next year.”

    GM execs do not consider NGDP, and no, it is not justified to argue that whatever aggregate kind of economic picture they are talking about, it’s all “really about NGDP”. it is not justified because it is not unique to NGDP. Any central plan that targets some aggregate dollar based statistic could be so justified. One could say “Oh, aggregate price level targeting? Of course GM execs talk about it. Maybe not directly, but when they talk about “the economy”, that’s what they really have in mind, because after all, price level indexes supposedly tell us the health of the economy.

    More importantly however, you said you are sure execs talk about “how much consumers in the aggregate will spend (in nominal terms) on cars next year.”

    That is NOT NGDP! That is the demand for (NGDP – everything not cars). You are AGAIN, for the millionth time, equivocating between NGDP growth and individual market nominal growth. The former does not imply the latter, and the latter does not imply the former!

    If NGDP rises, it does necessarily mean that the demand for GM cars rises. Are you not aware of the fact that some companies experience a decline in sales, despite NGDP not falling? please tell me you know about bankruptcies in a healthy economy.

    Execs almost certainly do NOT talk about NGDP in their boardrooms. I have personally sat in a few, but certainly not all, so this is anecdotal, but I have NEVER even heard or spoke about NGDP, nominal aggregate demand, total incomes, nothing at all about the thing you claim execs talk about. What I have heard is LOTS of talk about company direction, sales performance and forecasts, human resources, product development, lots of marketing, competitor estimates and comparisons. The only aggregate type concepts they ever talked about are GDP (which was always viewed in real terms) and price inflation, and as passing comments at that. I think that if you ask any exec what the importance of total incomes of not only their own company, not only their competitor’s companies, but the incomes of those outside their industries, they will likely say that is information they just don’t give a rodent’s posterior about.

    Of course, this is not to say that there are NO execs who talk about it. Such information would require omniscience. I can only go by experience and research, and so far I have seen bupkus. Maybe Sumner can commission a questionaire study and find out just how well known NGDP is. I suspect the findings will be grim.

    The execs already know pretty much what it will cost to manufacture cars next year, even in nominal terms.  So expected nominal spending on cars in 2013 is extremely important to GM execs when thinking about how much to invest in expanding their facilities.  Undoubtedly they break the forecasts down into unit sales and average prices, but both of those variables are very important to them.

    Expected nominal spending on cars is not expected NGDP.

    Suppose there existed a (truth telling) perfect predictor. Suppose this perfect predictor told the GM execs that next year, their sales are going to rise by 2%, and that NGDP is going to collapse 50%. Or, suppose that the predictor tells them that their sales are going to fall by 2%, and that NGDP is going to rise by 5%.

    Question: Which statistic are the GM execs going to use as THE guide in deciding their current nominal decisions?

    Now suppose that the perfect predictor tells GM that NGDP is going to rise by 5%, but he doesn’t tell GM execs what their sales are going to be. Or, suppose that the perfect predictor tells them that NGDP is going to fall by 2% next year, but he doesn’t tell GM execs what their sales are going to be.

    Question: Why in the world do you have this setup in mind (without “perfect” prediction of course) when thinking about NGDP growth targeting? NGDP estimates are the sum of individual firm demand estimates, and so it is impossible to predict NGDP without at the same time predicting individual market demands!

    In other words, the logical order of things is that firms estimate their individual demands, and the sum of these demand estimates then becomes the NGDP estimate. It is not the other way around. Firms do not estimate NGDP and then estimate what “share” they will get. This would require them to estimate the demands for every other firm, which I hope is easily seen as practically impossible.

    What NGDP targeting will do is reward some firms that made bad decisions, and punish other firms that made good decisions. Those that would have made losses if money was market driven, end up making gains, and those that would have made gains, end up incurring losses. It is not enough that individuals are told what NGDP will be next year. This doesn’t tell them their “share” of it, which is what they need to make current decisions. Since NGDP targeting will consist of micro-level inflation of the money supply (as do all other inflationary schemes, save the one that consists of every single individual receiving checks from the Fed), it will necessarily distort economic calculation, and thus generate malinvestments, which will build up continuously, and the only way such malinvestments can be prevented from experiencing a deflationary correction, is through accelerating money supply growth.

    NGDP is the Hail Mary, coup d’etat of inflation. I for one hope to be alive when inflation finally collapses. Wait, has that been the market monetarist plan all along? Did I just let the cat out of the bag?

  8. Gravatar of Major_Freedom Major_Freedom
    26. September 2012 at 21:23

    Chicago Fed just released a hilarious paper:

    http://chicagofed.org/digital_assets/publications/chicago_fed_letter/2012/cflnovember2012_304.pdf

  9. Gravatar of Major_Freedom Major_Freedom
    26. September 2012 at 21:54

    My favorite parts:

    “Given that bubbles may adversely affect the macroeconomy, what, if any, is the appropriate public policy response? For at least the past 25 years, the Federal Reserve has tended to follow an approach to asset bubble management in which there is little or no restrictive monetary policy action during the bubble’s formation and growth, but there is a prompt easing in the form of quick reductions in market interest rates once the bubble bursts. (This monetary policy easing is aimed at reducing the potential loss of output and employment.) That is, there was little response to changes in asset prices, except insofar as they were seen to signal changes in expected inflation and economic slack. The intellectual foundation for this approach was the seminal piece by Ben Bernanke and Mark Gertler (originally published in 1999). Their paper incorporates exogenous bubbles into asset prices and constructs a financial accelerator model. Asset bubbles affect real economic activity via both the wealth effect on consumer spending and the financial decisions of firms resulting from changes in the value of assets on their balance sheets. Simulations of their model led the authors to conclude that central banks should view price stability and financial stability as highly complementary. This policy strategy became known as the “Jackson Hole Consensus.””

    “Besides the reasons given by Bernanke and Gertler, there are other reasons for the neutrality of the Fed while bubbles grow: 1) It is difficult to identify a bubble and predict its ultimate magnitude; 2) the buildup of a bubble may take several years and the Fed cannot follow a restrictive monetary policy for such a long and uncertain period; 3) the federal funds rate adjustments are a rather blunt instrument, which cannot be directed precisely toward the bubble sector; and 4) there is no need to directly target the bubble because if it increased wealth that stimulated consumption and resulted in inflation, then the Fed would act because of its price targeting policy.”

    The Jackson Hole Consensus appeared to work well until September 2008, when the financial system came close to a complete meltdown.

    ————————————

    “We still do not have a good definition of an asset bubble; and we still do not know how to identify them, what causes them to grow or burst, or what their welfare implications are. More research needs to be conducted to address these questions.”

    ————————————

    Of course, the expected market monetarist response will be something akin to “the financial system was fine until NGDP collapsed in late 2008”, which of course contradicts the timing of events: 1. Housing bubble burst in 2006/7, MBS securities based on housing bubble collapsed in value, financial crisis in 2007, collapse of value of accumulated savings and capital, THEN we saw NGDP collapse in late 2008.

  10. Gravatar of Gordon Gordon
    27. September 2012 at 04:54

    M_F: No public goods? Are there no Prisoner’s Dilemmas either?

  11. Gravatar of Bill Woolsey Bill Woolsey
    27. September 2012 at 05:11

    Suppose the real demand for money is independent of real income. When people want to do more economic activity, “velocity” just rises. If economic activity was all barter, that would work. Or suppose it is all by “trade credit.”

    Anyway, think about that for a bit, and maybe it will make Cowen’s approach make some sense.

    Of course, it is not realistic.

  12. Gravatar of Saturos Saturos
    27. September 2012 at 05:18

    Atrios is advocating helicopter drops at USA Today: http://www.usatoday.com/news/opinion/forum/story/2012-09-25/ben-bernake-inflation-money/57840674/1

    Bill Woolsey +1

  13. Gravatar of Saturos Saturos
    27. September 2012 at 05:34

    Rather than using normatively charged (at least in popular discourse) terms like: “public good”, I would rather use the classic economic concept of a “co-ordination problem”. Macro is all about coordination problems (Nick Rowe: Amen!). In fact micro probably is too. Noah Smith recently pointed out that tax-choice fails due do coordination problem issues. Bryan Caplan talks about how monitoring the government is a coordination problem. And I’m taking my approach from David Friedman, of course.

    Anyway, Ryan Avent says a very similar thing to you, Scott, in his latest post, which I’ll repost: http://www.economist.com/blogs/freeexchange/2012/09/short-runs

    “In that case movements in NGDP and RGDP would be perfectly correlated, even though there was no causal relation running from NGDP to RGDP.” But there would be a causal relationship from RGDP to NGDP (via the Fed), so it’s not true to say, “despite the fact that NGDP and RGDP are highly correlated, there is no causal relationship.”

    MF, love how you quoted Scott and then “rebutted” him in a way that actually agreed with him.

  14. Gravatar of Saturos Saturos
    27. September 2012 at 05:39

    From Ryan Avent’s post:

    Tyler Cowen expresses some discomfort with this view of NGDP, that it is a tangible and scarce thing that can only be spread around so thinly. He writes:

    My framing is different. My framing is that the private sector can manufacture its own ngdp. It can do so by trade and it can do so by credit and of course velocity is endogenous to the available gains from trade. Most of the major central banks are, today, not obsessed with snuffing out recovery and increases in real output.
    To say “ngdp is low,” or “ngdp is on a low growth path,” or “ngdp is below trend,” and so on “” be very careful! Those claims do not necessarily have causal force. Arguably they are simply repeating, in a new and somewhat different language, the point that the private sector has not seen fit to engage in more trade, credit creation, velocity acceleration, and so on.

    That’s a fair point. But it’s one I was trying to get at in my post on negative demand externalities. The Fed’s role can be viewed not as turning on the NGDP machine and creating more NGDP to distribute to private firms and households but as coordinating expectations across the private sector in order to arrive at a better equilibrium. If the Fed fails to play this coordinating role, the market may not be able to clear on its own. Firms are now building more and selling more, but we need them to build and sell a lot more if the stock of unemployed workers is to return to normal levels. But right now, firms are doing the equivalent of standing around saying to each other, “Well, I’ll build a lot more if you buy a lot more”, “Well, I’ll buy a lot more, if you hire a lot more”, and around and around. The Fed can and should put out word that now is the time for everyone to take the leap.

  15. Gravatar of Saturos Saturos
    27. September 2012 at 05:41

    Bill, couldn’t Tyler say though that the money multiplier reduces base demand, and it increases as a function of expected gains from trade, provided the Fed doesn’t offset?

  16. Gravatar of Rob Rawlings Rob Rawlings
    27. September 2012 at 05:58

    “If we have a NGDP problem, the private sector could solve it by manufacturing more NGDP. But they’d have no incentive to do so.”

    Lack of NGDP is often due to increased demand for money. The Fed sometimes fails to match money supply to money demand so its value bounces around and because of price stickiness NGDP bounces around with it. However private currency issuers who committed to keep the value of their currency stable as an incentive to get people to use it would have an incentive to “manufacture more NGDP”, albeit indirectly.

  17. Gravatar of Gordon Gordon
    27. September 2012 at 06:09

    Saturos: Are you referring to the arch central planner David Friedman?

  18. Gravatar of Morgan Warstler Morgan Warstler
    27. September 2012 at 08:18

    1. If NGDPLT has to have make-up to work, WHY is it so great?

    2. If it doesn’t need make-up to work, how does the recovery happen?

  19. Gravatar of Saturos Saturos
    27. September 2012 at 08:29

    Gordon, Huh???

  20. Gravatar of Saturos Saturos
    27. September 2012 at 08:30

    Morgan, depends what you mean by “work”. NGDPLT would prevent future crises, through the self-stabilizing property, even if we didn’t do catch-up to get out of this one.

  21. Gravatar of Major_Freedom Major_Freedom
    27. September 2012 at 08:45

    Gordon:

    M_F: No public goods? Are there no Prisoner’s Dilemmas either?

    No public goods. The prisoner’s dilemma is a theoretical construct that always presumes a particular set of rules, and in my experience, the prisoner dilemma type rules are never an accurate description of reality. They are always artificial.

    Saturos:

    MF, love how you quoted Scott and then “rebutted” him in a way that actually agreed with him.

    Love how you are not specific enough to elicit a clear understanding of what you are talking about.

  22. Gravatar of Major_Freedom Major_Freedom
    27. September 2012 at 08:47

    Gordon:

    Every argument ever presented for the justification of public goods, from negative externalities, to prisoner’s dilemmas, are all based on a denial of the context that is individual property rights. They all presume individual property to be violated as the initial starting point, and then they ask how the market process would handle it.

  23. Gravatar of Major_Freedom Major_Freedom
    27. September 2012 at 08:48

    Saturos:

    Morgan, depends what you mean by “work”. NGDPLT would prevent future crises, through the self-stabilizing property, even if we didn’t do catch-up to get out of this one.

    Saturos, depends on what you mean by “crisis”, and “stabilizing”.

  24. Gravatar of George Selgin George Selgin
    27. September 2012 at 09:22

    “Tyler Cowen recently pointed out (correctly) that if we hold the money supply constant, the private sector could manufacture more NGDP growth by acting in such a way as to boost velocity. That’s true. Whether it would actually work depends on how the Fed responds to a rise in velocity.”

    For the life of me, and having read Tyler’s post, I cannot see any justification for Tyler’s assertion. Wat grounds are there for imagining that, with constant M (however defined), the private sector will see to it that V increases at some steady rate? One might just as well assert that, if M is allowed to shrink, the private sector will automatically make up for that as well by seeing to it that the demand for M shrinks even more (that is, that V grows still faster). Of course, in the very long run, markets tend to address shortages of particular sorts of exchange media–thus the growth in use of checks in place of currency (and consequent increase in the velocity of currency) during the 19th century in response to an artificially constrained currency supply. But that long-run adaptation was of no help in preventing cyclical and seasonally increases in currency demand from leading to serious crises.

    Under some circumstances it’s true that private market financial institutions can tend automatically to stabilize MV, even if the stock of base money is constant. I’ve devoted a lot of research to this very possibility, showing how it might arise under a free banking system, that is, if banks can issue currency and are free from any statutory reserve requirements. Even then there are a number of other special conditions that must hold to get the stable MV result.

    Tyler, in contrast, asserts that this result–or better yet, a constant growth rate of NGDP, might be realized even in our present centralized and regulated monetary system were the base (or some other measure of M) constant. For once I’m tempted to ask him, “Where’s your model?” As a question insisting on a particular sort of formal model, I’ve always found the query obnoxious. But in this case I’d merely like to see any sort of logical argument–that is, something more than a naked assertion. Like Scott, I like to know how, exactly, an NGDP shortfall gives rise to profitable opportunities for agents to make due with lower real money balances.

  25. Gravatar of George Selgin George Selgin
    27. September 2012 at 09:25

    “Pardon me that “make due” for “make do,” among more minor typos.

  26. Gravatar of Major_Freedom Major_Freedom
    27. September 2012 at 10:24

    George Selgin:

    Wat grounds are there for imagining that, with constant M (however defined), the private sector will see to it that V increases at some steady rate? One might just as well assert that, if M is allowed to shrink, the private sector will automatically make up for that as well by seeing to it that the demand for M shrinks even more (that is, that V grows still faster). Of course, in the very long run, markets tend to address shortages of particular sorts of exchange media-thus the growth in use of checks in place of currency (and consequent increase in the velocity of currency) during the 19th century in response to an artificially constrained currency supply. But that long-run adaptation was of no help in preventing cyclical and seasonally increases in currency demand from leading to serious crises.

    What grounds are there for imagining that, with constant NGDP (however defined), the private sector will see to it that the nominal demand for horse drawn carriages increases at some steady rate? One might just as well assert that, if NGDP is “allowed” to shrink, the private sector will automatically make up for that as well by seeing to it that the demand for NGDP shrinks even more (that is, the relative nominal demand for horse drawn carriages grows still faster). Of course, in the very long run, markets tend to address shortages of particular sorts of vehicles – thus the growth in use of cars in place of carriages (and consequent increase in the demand for cars) during the 20th century in response to an artificially constrained vehicle supply. But that long-run adaptation was of no help in preventing cyclical and seasonally increases in car demand from leading to serious losses to horse drawn carriage manufacturers.

    Ergo, inflation, because it can save horse drawn carriages from the ravages of horse drawn carriage deflation, because inflation can prevent a fall in demand for horse drawn carriages, we now have a pragmatic, non-dogmatic justification for central banking money printing rules, if central banks are to exist and we need to figure out the best of the worst thing to target. After all, if the focus is jobs, and output, then we never have to experience the calamities of unemployment or idle resources ever again during periods of creative destruction. We can eliminate unemployment altogether.

    Target firm level NGDP! Every firm from here on out will experience a 5% growth in revenues each and every year. In this way, investors and entrepreneurs won’t have to reduce wages for anyone, and they can be sure that no matter what, next year’s revenues will be 5% higher. I don’t care if inflation is 20% or -20%. What matters is firm level NGDP. With so many idle resources and unemployed people, firm level NGDP targeting will almost certainly lead to a rise in RGDP.

    Who’s with me?

  27. Gravatar of Saturos Saturos
    27. September 2012 at 10:47

    Scott said: We (almost) all benefit from low and stable NGDP growth. But at an individual level we have no incentive to behave in such a way as to produce low and stable NGDP growth.

    MF goes on to argue that inflation is bad for everybody. Takes this as rebuttal of Scott’s argument.

    George Selgin +2

  28. Gravatar of Saturos Saturos
    27. September 2012 at 10:48

    What the heck are you talking about now MF?

  29. Gravatar of Macroman1 Macroman1
    27. September 2012 at 10:59

    Scrolling past Major Freedom’s rambling, long comments to get to the other comments is a public bad. Time to impose a Pigouvian tax on Major Freedom posts.

  30. Gravatar of Gordon Gordon
    27. September 2012 at 19:57

    Saturos – Sorry, I guess I should have added a smiley face. I was just having fun with the notion that public goods are a “fiction of central planner’s imaginations, designed specifically to serve as an intellectual justification for naked aggression of the state”. I don’t want to take up any more of Scott’s blog space just joking around, so I’ll let it go at that.

  31. Gravatar of Saturos Saturos
    27. September 2012 at 22:26

    Macroman1, johnleemk said he was going to develop a Chrome extension specifically for filtering out MF posts, which I’m looking forward to.

    Gordon, ah, now I get it. Because David Friedman of course is the very opposite of a central planner…

  32. Gravatar of ssumner ssumner
    28. September 2012 at 05:37

    Macroman, My tech support will look into creating a “below the fold” on long comments. I hope they are able to do so–but it usually takes them a while. I’ll let you know.

    George, I have to think that it was a clumsily worded assertion of the argument that real GDP was low for reasons not related to NGDP, and then if RGDP rose due to something like better supply-side policies, it would as a side effect boost velocity. So NGDP would not be a constraint. But I agree that Tyler worded the post in a way that makes it impossible (for me) to be sure what exactly what he is trying to say.

    What makes this trickier is that Tyler always insists that demand (or NGDP if you prefer) does matter to some extent. So when he makes arguments he’s actually talking about the relative importance of various factors, not a sort of either/or argument that you might get from someone more radical. But I find that it’s often hard to place his particular arguments into the framework that he sets up in other posts. So he’ll argue that sticky wages do matter in one post. Then he present posts seeming to show sticky wages aren’t an issue. I think you have to read those as saying “sticky wages do matter, but are less of an issue than MMs think.”

  33. Gravatar of John B. Chilton John B. Chilton
    28. September 2012 at 07:21

    Scott,

    You’ve thought about this far more than me. I have not read all the comments about attacking your “public goods” argument, so I want to disassociate myself from all of them. But it seems to me you really mean multiple equilibrium. Yes, we could all be better all if we acted like the economy would improve. But the typical public goods problem is its not an equilibrium — the individual would cheat. But in this case if you deviate from the good equilibrium you as an individual have missed the boat. (You failed to make the investment in an apartment building that now has a high return because the economy is healthy and people have nominal income to pay a remunerative rent for apartments.) It IS an equilibrium. What am I missing?

  34. Gravatar of Major_Freedom Major_Freedom
    28. September 2012 at 07:56

    Saturos:

    Scott said: We (almost) all benefit from low and stable NGDP growth. But at an individual level we have no incentive to behave in such a way as to produce low and stable NGDP growth.

    That’s why low and stable NGDP growth should not be imposed on individuals! If individuals have no incentive to do X, then X is not as important.

    The idea that if X is not sought after by individuals, that they should be made to behave as if they are, by force, is the very ideology behind totalitarianism. In this case it is a form of monetary totalitarianism.

    MF goes on to argue that inflation is bad for everybody. Takes this as rebuttal of Scott’s argument.

    Yes, because “low and stable NGDP growth” requires inflation, which I argue is bad for everyone (in the long run), if everyone values material well being and modern material civilization.

    What’s the issue here?

    What the heck are you talking about now MF?

    Which part?

    Macroman1:

    Scrolling past Major Freedom’s rambling, long comments to get to the other comments is a public bad. Time to impose a Pigouvian tax on Major Freedom posts.

    Leave it to a fan of centrally planned spending targeting to consider himself judge of what is a public bad and what is not, and to advocate for censorship…on someone else’s blog. Suppose I consider your posts a “public bad.” Then what?

  35. Gravatar of Philo Philo
    28. September 2012 at 13:58

    I think Scott’s statements that “(equity) investors” want this or believe that are meant to be interpreted collectively rather than distributively. That is, his point is not about what individuals want or believe, but about what that collective entity, *the market*, wants or believes. The market is wise, though many””perhaps most””of the individuals that make it up are foolish.

  36. Gravatar of Peter N Peter N
    28. September 2012 at 22:30

    “We still do not have a good definition of an asset bubble; and we still do not know how to identify them, what causes them to grow or burst, or what their welfare implications are. More research needs to be conducted to address these questions.”

    We have an adequate definition and we can identify them. We even know what causes them to grow. We don’t know, however, exactly when they’ll burst. This makes it difficult for time arbitrage to work. There’s an old saying that “a stock can remain mispriced longer than you can remain solvent”

    People started predicting the bursting of the housing bubble around 2003. If you had gone short then, you’d have lost your shirt. The real problem is timing and control. Identification isn’t good enough if your playing with real money.

    For instance we now have a large and growing college expansion/college loan bubble. What would you do about it?

    Canada seems to be near the top of a huge housing bubble. What can you do about it?

  37. Gravatar of ssumner ssumner
    29. September 2012 at 07:27

    John, You may be right, or at least partly right. I’m not good at doing that sort of model in my head.

  38. Gravatar of AaronF AaronF
    2. October 2012 at 02:42

    Good stuff. It’s almost as if the new Keynesianism and market monetarists have realized that both arguments for looser monetary policy and fiscal policy both have some teeth! Maybe the Internet is good for something after all…

    One question though, what is the famous L-shaped NGDP chart?

  39. Gravatar of Saturos Saturos
    4. October 2012 at 02:51

    AaronF, see this post: http://monetaryfreedom-billwoolsey.blogspot.com.au/2012/09/diagrams.html

  40. Gravatar of Saturos Saturos
    4. October 2012 at 02:52

    John, I think that’s exactly how it is: a prisoner’s dilemma. Nick Rowe has posts to this effect. And then there’s the Ryan Avent post I linked to above.

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