And now the other shoe drops . . .

From the Financial Times:

Treasury Open To Carney Radicalism

The Treasury opened the door to a more aggressive monetary policy on Wednesday, as aides to the chancellor welcomed the next Bank of England governor’s radical views on stimulus measure for flagging economies.

In a speech on Monday, Mark Carney suggested setting targets for the overall size of the economy, or nominal gross domestic product, rather than inflation. While Treasury officials said there were currently “no plans” to ditch the BoE’s 2 per cent inflation target, a spokesman for George Osborne added that “there’s quite a lot of interest in what he has to say … It reaffirms the fact that he is the central banker of his generation.”

Mr Osborne’s aides added that the chancellor was well aware of Mr Carney’s views on inflation targeting when he was appointed.

Any move to nominal GDP targeting would require the BoE to embrace bolder stimulus measures, even at the cost of higher inflation. Under its current governor, Sir Mervyn King, the BoE has been dismissive of nominal GDP targeting, even though some senior bank officials are privately attracted to its simplicity.

Spencer Dale, BoE chief economist, softened his stance on Wednesday, saying no ideas should be ruled out. He maintained, however, that nominal GDP targeting risked letting “the economy overheat relative to what you otherwise would have done”.

Mr Osborne’s aides are concerned the chancellor’s deficit reduction targets have slipped because the economy is not growing fast enough.

There is also wider political support for a new approach. In June, Vince Cable, business secretary, called for more “innovative” monetary policy that would generate a “robust recovery in money spending and GDP”.

And then there is this story:

In an August interview for the BBC, Mark Carney was definitive about the Bank of England governorship. “So is that a ‘no’ or a ‘never’”? he was asked. The reply came: “It’s both”.

Public denials of interest were reinforced in private by Mr Carney and his aides. Such was the certainty that the question on Monday was how did “never” become “yes”.

That affirmative took Westminster and the City of London by surprise when Mr Osborne announced that the Canadian would take over from Sir Mervyn King at the British central bank, in preference to an array of domestic candidates, with a mission to shake up the bank as it assumes sweeping new powers.

Announcing the appointment of the first foreigner to the post in the BoE’s 318-year history, Mr Osborne told the House of Commons that the ex-Goldman Sachs banker was “quite simply the best, most experienced and most qualified person in the world to do the job.”

 .  .  .

But come the summer, Mr Osborne was a disappointed man. The Financial Times story in April, saying Mr Carney had been approached for the governor’s job, had forced the Canadian to issue ever more vehement denials. The Treasury believed them and was told “no” definitively, so officials believed.

They insist Mr Carney was not lying because his denials were true at the time.

Mr Carney had told UK officials he did not want the strings attached to the job: a central bank with an economy in severe difficulties; a salary much lower than he liked, the need to move his wife and four daughters to Britain, and the prospect of serving an eight-year term.

According to people who have spoken to him, personal issues had held him back from applying. “His wife is happy in Canada and his kids are all happy in school. Personal issues were looming quite large,” said one friend.

But for each problem raised by the Canadian, Mr Osborne found a solution, such was his desire to have an outsider with a reputation as a brilliant manager as well as policy maker.

Instead of Sir Mervyn King’s salary of £305,000, Mr Carney will receive £480,000 plus a 30 per cent pension contribution. He could serve only five years instead of the eight stipulated in law. And the BoE will also provide relocation and housing expenses, never cheap in central London, although the Treasury insists the BoE will not pay Mr Carney’s school fees.

The BoE’s flexibility with the relocation and housing allowances were a key swing factor. Though Mr Carney had previously earned banker’s pay levels while at Goldman Sachs, he has been relatively modestly remunerated at the Bank of Canada.

Once the deal was sufficiently sweetened and Mr Carney had joined the race, aides to the chancellor say the process moved very quickly in a successful attempt to avoid leaks.

So they got the best central banker in the world, and like his ideas to go for growth.  Does it seem likely that the Treasury will say no to NGDP targeting?

Is it possible that this might really happen?

Other comments from Britmouse, Nick Rowe, Marcus Nunes, Lars Christensen.

PS.  David Beckworth and Ramesh Ponnuru have an excellent new article on the fiscal cliff:

It could counteract the effects of the fiscal cliff, too. The Fed could best do this by explicitly adopting a nominal-spending target. The more credible that target, the less the Fed would have to do to reach it: Private-sector expectations of future spending powerfully influence current spending levels. Knowing that the Fed would do whatever it takes, including aggressive open market operations, to maintain steady nominal GDP growth would create confidence and more economic certainty for households and firms — regardless of whether the government was cutting spending. The effect should be to offset every dollar of reduced government spending by roughly a dollar of increased private spending.

The Fed cannot undo the effects of any bad policy Congress enacts: It can’t, for example, restore incentives to work, save, and invest if legislators stifle them. What the Fed does have the power to do is to keep the Keynesian nightmare from taking place. We might fall off the fiscal cliff and then go into a recession. But if we do, it will be because the Fed failed to do its duty.


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43 Responses to “And now the other shoe drops . . .”

  1. Gravatar of Steve Steve
    12. December 2012 at 20:07

    This fills me with hope and fear at the same time.

    Hope that the UK will be the first to implement NGDP targeting.

    Fear that NGDP targeting will perform poorly because the UK has one of the worst economies in the world: massive social entitlements, high taxes, crashing oil production, and huge trade dependency on the medieval Eurozone.

  2. Gravatar of Tyler Joyner Tyler Joyner
    12. December 2012 at 20:48

    On the other hand, Steve, if Carney was responsible for establishing a NGDP targeting system in the UK and it did succeed in boosting the economy, it’d be easier to demonstrate that NGDP targeting was the cause of the improvement, and not some other factor.

  3. Gravatar of Tyler Joyner Tyler Joyner
    12. December 2012 at 20:51

    As opposed to some other countries, that is.

  4. Gravatar of jknarr jknarr
    12. December 2012 at 21:05

    Scott —

    I’m hopeful, but I am concerned that “dirty” NGDP targeting might take form – -in other words, they might maintain the traditional central bank reserve model alongside tying themselves to the NGDP mast. There are tensions between bank reserve creation and NGDP trend requirements that will develop into imbalances, I feel. A good question is what sort of imbalances might form.

    Clean NGDP targeting would mean eliminating the central bank, or making it into a near-currency-board equivalent, and leaving seignorage to direct Treasury spending and printing. I’m not sure that any central bank will willingly strip itself of powers and make itself obsolete.

    Re the earlier bank seignorage question, IOR now transfers traditional Treasury seignorage income to the banks. I’d also wonder if commercial banks do gain some degree of seignorage from the lending-based creation of demand deposits, or from the Fed-sponsored provision of “permanent capital” in commercial bank balance sheet assets (which is cheaper than common equity), or is related to what we just call moral hazard.

  5. Gravatar of Steve Steve
    12. December 2012 at 21:20

    “if Carney was responsible for establishing a NGDP targeting system in the UK and it did succeed in boosting the economy, it’d be easier to demonstrate that NGDP targeting was the cause of the improvement”

    Tyler, true, but “working” might be 1% RGDP, 4% inflation and Krugman screaming that they need fiscal stimulus.

  6. Gravatar of Bank of England & Carney: This Doesn’t Sound Good Bank of England & Carney: This Doesn’t Sound Good
    12. December 2012 at 21:30

    [...] Scott Sumner links to this article from the Financial Times. I’m feel queasy. Take a look: The [UK] Treasury opened the door to a more aggressive monetary policy on Wednesday, as aides to the chancellor welcomed the next Bank of England governor’s radical views on stimulus measure for flagging economies. [...]

  7. Gravatar of Greg Ransom Greg Ransom
    12. December 2012 at 22:19

    Competing currency devaluations.

    You’re going to love that, Scott!!

  8. Gravatar of Russ Abbott Russ Abbott
    12. December 2012 at 22:44

    For those of us who are not economically sophisticated, would you mind explaining how the Fed achieves an NGDP target. I understand that the Fed is able to buy virtually unlimited amounts of bonds of various sorts. Presumably this forces those who would have owned those bonds to do something else with their money. But why do we think they would spend it? There already is a lot of money not doing anything. Why would more make a difference? I don’t understand how Fed actions are mechanically linked to GDP growth.

    Thanks.

  9. Gravatar of Richard W Richard W
    12. December 2012 at 23:15

    Steve
    12. December 2012 at 20:07

    ” This fills me with hope and fear at the same time.

    Hope that the UK will be the first to implement NGDP targeting.

    Fear that NGDP targeting will perform poorly because the UK has one of the worst economies in the world: massive social entitlements, high taxes, crashing oil production, and huge trade dependency on the medieval Eurozone. ”

    I keep hearing stuff like this usually with some vague references to undefined supply problems. The ” massive social entitlements ” are probably near the bottom in the EU.

    Personal taxes could be lower but the government tax take at 35% of GDP is not extraordinarily high in comparison with peers. The effective average corporate tax rate after Canada is the second lowest in the G7.
    http://www.sbs.ox.ac.uk/centres/tax/Documents/reports/G20_Corporate_Tax_Ranking_2011.pdf

    In the G7, again after Canada the UK tax system is the 2nd most effective.
    http://pwc.blogs.com/scotland/2012/11/uk-steps-up-league-table-of-effective-tax-systems-.html

    North Sea production has been in decline for over a decade but it is not crashing. Trade is gradually moving away from being overly focused on Europe, not fast enough but heading in the right direction.

    The labour market is now the 5th most flexible labour market in the world and ahead of the US labour market which is in 6th place. Even after four years of sluggish growth the World Economic Forum rates the economy as the 8th most competitive in the world.
    http://www.guardian.co.uk/business/2012/sep/05/uk-competitive-country-world-economic-forum

    In the OECD, after the US it is the 2nd least restrictive for product market regulation.

    The least restrictive in the OECD for barriers to entrepreneurship.

    The fourth best country in the world in ease of doing business behind only Singapore, Hong Kong and New Zealand.
    http://admin.bvca.co.uk/library/documents/SMEs_Entrepreneurs_%28June_2011.pdf

    The education system is the 2nd best after Japan in the G7, and the 6th best in the world.
    http://thelearningcurve.pearson.com/the-report/towards-an-index-of-education-outputs

    So where are all these supply problems that I keep hearing about? The UK looks to be a classic case of demand problems.

  10. Gravatar of Bank of England & Carney: This Doesn’t Sound Good – Unofficial Network Bank of England & Carney: This Doesn’t Sound Good - Unofficial Network
    12. December 2012 at 23:23

    [...] of England & Carney: This Doesn’t Sound Good Posted on December 13, 2012 by admin Scott Sumner links to this article from the Financial Times. I’m feel queasy. Take a look: The [UK] [...]

  11. Gravatar of Benjamin Cole Benjamin Cole
    12. December 2012 at 23:25

    He was tall, blonde. Came into Central Bankersville, off the dusty high plains, one hot afternoon. A loner.

    Said he had been hired to clean the town up. Went to the “Tight Money” saloon, pulled his duster open, showing braced Smith & Wessons. Stared stonily all around. A few dared him, but had the pistols shot right out of their hands.

    The saloon cleared out, and renamed itself “The NGDP Targeting Range.”

    Hoofbeats were heard from the rapidly departing.

  12. Gravatar of Kenneth Duda Kenneth Duda
    12. December 2012 at 23:38

    > Fear that NGDP targeting will perform poorly because the
    > UK has one of the worst economies in the world: massive
    > social entitlements, high taxes, crashing oil production,
    > and huge trade dependency on the medieval Eurozone.

    Steve: is the UK demand constrained or not?

    If the UK is sputtering because of an AD shock like we have in the US, then NGDP targeting will be a huge improvement.

    If the UK is actually supply constrained, then you take whatever expected population growth and whatever little productivity growth there may be, and add 2% for inflation, and there’s your NGDP target, and you’re no worse off than currently.

    > For those of us who are not economically sophisticated,
    > would you mind explaining how the Fed achieves an
    > NGDP target.

    Hi Russ, I responded to this same question from you on the Beckworth Atlantic article. I am not an economist myself, and I had the same question when I first bumped into the NGDPLT concept earlier this year. Scott brushed me off with a comment like, “no central bank has ever tried to create inflation and failed,” but that was just not satisfying. But now I am convinced he is right. The Fed simply buys assets at an increasing pace, telling the world over and over that there will be a 5% NGDP increase, and it will buy every treasury and mortgage-backed security and shred of foreign currency until there is. Some market participants might still not believe it, and many will. The Republicans and the Wall Street Journal will help us out here, screaming bloody murder about the impending inflationary doom. This leaves people with nowhere to put their cash (because the Fed has purchased every asset there is) and who wants to hold cash if they’re afraid of 5% inflation? Time to spend!

    And the beautiful thing is this: all it takes is a credible expectation of 5% inflation, and spending picks up, and since we are demand constrained, the extra spending doesn’t actually cause significant inflation. It will simply drive the economy back up to its potential. We are running further below potential today than any time since the 1930′s. It’s really quite an amazing situation.

    -Ken

  13. Gravatar of RebelEconomist RebelEconomist
    12. December 2012 at 23:51

    The juxtaposition of the first and second halves of your post suggests that Carney’s principles can be bought.

    I struggle to think of a western in which the hero gets paid for cleaning the town up, Benjamin. Anyway, I will not forsake inflation targeting.

  14. Gravatar of Benjamin Cole Benjamin Cole
    13. December 2012 at 00:08

    RebelEconomist–

    Surely you jest.

    Clint Eastwood wasn’t it, in “High Plains Drifter?”

    And the Three Amigos thought they were going to get paid.

  15. Gravatar of Britmouse Britmouse
    13. December 2012 at 00:21

    I keep having to pinch myself.

    http://www.telegraph.co.uk/news/politics/9741052/Bank-of-England-could-get-new-growth-target.html

    The Daily Telegraph understands that senior Government figures are privately pressing the George Osborne, Chancellor to consider giving the Bank a new target of increasing the size of the economy.

  16. Gravatar of RebelEconomist RebelEconomist
    13. December 2012 at 00:51

    I can’t remember High Plains Drifter, Benjamin……didn’t Clint turn out to be a ghost or something?…..but often part of what makes the saviour a hero is that he turns down payment. We’ll have to wait to see if Carney does that!

  17. Gravatar of RebelEconomist RebelEconomist
    13. December 2012 at 01:02

    Don’t be surprised, Britmouse. Osborne is a career politician. He will do anything to please the punters, and anything to make it look respectable. Look at his repeated delays in petrol tax increases. The UK dropping yet another economic target when it mandates unpopular action is bad enough, but exchanging it for a target that will ease the downward pressure on the British housing market would be an absolute disaster. It is like watching a car crash in slow motion.

  18. Gravatar of Britmouse Britmouse
    13. December 2012 at 01:26

    Rebel, maybe Osborne has realised the problem with raising indirect taxes when you have a central bank which likes tight money and low inflation?

    The problem is you tight money guys were saying house prices were too high in 2007, and that we need tight money and a bit of suffering before we can be saved from our sins. We had tight money and a bit of suffering, and house prices have come down a bit. Now, strangely, your new policy is that we need tight money and some more suffering, and we can be saved from our sins.

    The time when the UK had the most successful supply-side reform (which is maybe what you really want), the 1980s, we also had demand-side reform. And that meant appropriately strong NGDP growth. 8-10% worked fine for Thatcher, with 4%+ inflation, but this time you want 0-2% NGDP growth and 2% inflation? Good luck with that.

  19. Gravatar of RebelEconomist RebelEconomist
    13. December 2012 at 01:52

    Well, there are various ideas of what constitutes tight money, Britmouse, but you have to admit that whatever the stance of UK monetary policy has been, it has not been tight enough to deliver the inflation target. Just that bit tighter would have been enough for me. If that had prompted a larger fall in house prices, like in the US, great. We in the UK really, really need ordinary people to leave some margin for error when they take on commitments like mortgages. Otherwise, whatever economic target we adopt will be undone whenever it mandates restrictive measures, for fear of precipitating economic collapse.

  20. Gravatar of Shining Raven Shining Raven
    13. December 2012 at 02:13

    @Russ Abbott:

    I did not understand this either, but the basic idea is simple: If people press Scott, how an NGDP target can be reached, he responds with: “Do you doubt that the Fed can achieve inflation? It would be the first central bank that couldn’t! If it starts buying stuff, then of course prices are going to rise!” or something similar.

    So he really wants the Fed to buy other stuff besides bonds, or at least credibly threaten to do so, which he believes might be enough to lead to higher inflation expectations that are then self-fulfilling.

    There is some other stuff about an NGDP futures market, but if I understand this idea correctly, this is mainly about harnessing the “wisdom of markets” for finding the right Fed policy to achieve the NGDP target. I do not understand why anybody would have a stake in this market and participate, or why this would generate or aggregate useful information (since nobody hedges on NGDP as such), but what do I know.

    The main point is that people have to believe that the Fed or central bank can influence NGDP for this to work. And again, the mechanism would be that the Fed has to threaten to buy “other stuff” besides bonds, if bond purchases don’t do the trick.

    My take on this is that it is fiscal policy by another name, done not by Congress, but by unelected technocrats at the central bank, who have to decide on what to buy anyway, just as Congress would have to do. It seems to appeal to Scott and monetarists because it appears to leave out the messy political process necessary for fiscal policy done by Congress.

    I believe that this is quite naive, since there is certainly going to be a lot of lobbying at the Fed as soon as it starts to buy assets beyond treasury bonds and even real goods (yes, I know that during QE it has already bought stuff like MBS, and I certainly consider this to be a “political” decision to help the banks, though not necessarily a wrong one). The Fed would then be political.

    I am pretty sure Scott disagrees with my characterization, but behind the fancy talk, this seems to me what it really boils down to. So the “mechanical link” between Fed policy and NGDP growth would be the Fed spending money directly – in my book, a fiscal operation if there ever was one.

    Scott disagrees that the zero lower bound is a real obstacle to Fed policy, and that the problem is just that they have the wrong target. He denies that the Fed cannot get more money into circulation (because he does not see that the banking system is a buffer between the reserves that the Fed can control and the actual amount of money and credit that people use to affect their transactions).

  21. Gravatar of Shining Raven Shining Raven
    13. December 2012 at 02:32

    @ Russ Abbott:

    One of the first blog posts I read on this blog was this one:

    http://www.themoneyillusion.com/?p=5893

    I found the (long) comment thread on that post very illuminating. The point of the discussion there is exactly the one that you make above, that the Fed can increase reserves in the banking system by buying bonds, but that this does not necessarily mean that the actual amount of “money” in circulation increases and that economic activity or inflation pick up.

    The post that probably is most helpful for you to understand Scott’s view is this one:

    Do OMOs “work” at the zero bound? That’s the wrong question.

    http://www.themoneyillusion.com/?p=15964

    Scott writes in that post:

    “Everyone (I think) agrees that if the Fed bought up all of planet Earth, then OMOs would be “effective,” i.e. they’d boost expected NGDP growth. When Keynesians worry about a lack of effectiveness of monetary policy, they typically restrict the term ‘monetary policy’ to something narrower than buying up all of planet Earth. Indeed they often call the purchase of non-government securities “fiscal policy.” ”

    This to me has made Scott’s idea much more clear. I really think it is fair to say that he wants the Fed to buy all kinds of stuff (or reasonably threaten to do so), and then he wants to call this “monetary policy”, because it is the FEd doing it, not Congress or the government in a more narrow sense.

    Doesn’t make sense to me to do it this way, but hey….

  22. Gravatar of JN JN
    13. December 2012 at 04:46

    I am definitely not convinced about Carney’s methods, and I would be very careful before endorsing him as the saviour…

    Canada’s household debt as a percentage of GDP is now higher than in the UK, a now constant trend since 2000.
    Doesn’t sound very reassuring to me, given that much of the UK’s current issues come from too high private indebtedness.
    Looks to me that Carney’s credentials might have been slightly exaggerated…

    See chart:
    http://www.economist.com/news/britain/21567407-mark-carney-will-be-banks-next-governor-what-britain-getting-canada-guy

  23. Gravatar of JN JN
    13. December 2012 at 04:56

    Sorry, my comment above referred to household debt as a percentage of income, not GDP.

    Although as a percentage of GDP, Canada has now overtaken the US and is now pretty close to the UK…

  24. Gravatar of Major_Freedom Major_Freedom
    13. December 2012 at 05:08

    It could counteract the effects of the fiscal cliff, too. The Fed could best do this by explicitly adopting a nominal-spending target. The more credible that target, the less the Fed would have to do to reach it: Private-sector expectations of future spending powerfully influence current spending levels.

    Knowing that the Fed would do whatever it takes, including aggressive open market operations, to maintain steady nominal GDP growth would create confidence and more economic certainty for households and firms — regardless of whether the government was cutting spending. The effect should be to offset every dollar of reduced government spending by roughly a dollar of increased private spending.

    The Fed cannot undo the effects of any bad policy Congress enacts: It can’t, for example, restore incentives to work, save, and invest if legislators stifle them. What the Fed does have the power to do is to keep the Keynesian nightmare from taking place. We might fall off the fiscal cliff and then go into a recession. But if we do, it will be because the Fed failed to do its duty.

    No mention of catallactics of money. No mention of economic calculation. No mention of relative prices and spending. No mention of the price system as it pertains to resource and labor allocation. No mention of the need for accelerated money growth to postpone malinvestment.

    A private sector business does not take into account future aggregate spending. It takes into account the spending of its own particular market, specifically, the prices of its own particular market. NGDP increasing by X% does not mean every single business will experience an X% increase in sales. Why do MMs keep repeating the same errors over and over?

  25. Gravatar of Brian Donohue Brian Donohue
    13. December 2012 at 05:33

    I thought Carney’s comments, excerpted by Nick Rowe, were great. Not enough kool-aid for some, but…

  26. Gravatar of Major_Freedom Major_Freedom
    13. December 2012 at 05:52

    NGDP targeting counteracting the fiscal cliff? By buying more government debt, thus enabling more government borrowing? That’s a major reason why we are where we are.

    Estimated government spending for 2013 is (Warning: PDF) $3.8 trillion. (See page 205).

    If the IRS taxed everyone who makes over $250k/year a tax rate of 100% (and I don’t mean marginal taxes, whereby only that portion above $250k is taxed 100%, I mean taxing the entirety of those people’s annual incomes), then ignoring supply side Laffer effects, and assuming the taxpayers will not be able to “hide” any income, then according to 2010 data, that will include 2.7 million taxpayers who would pay an estimated total tax revenue of (Warning: Excel) $1.8 trillion. (See cell I13).

    Thus, even if the IRS took every last nickel of earnings from all 2.7 million of those who are expected to earn $250k or above next year, the taxes would be able to finance the government’s spending for just under 6 months.

  27. Gravatar of Major_Freedom Major_Freedom
    13. December 2012 at 05:59

    This is why “soak the rich” is just politics, not economics.

  28. Gravatar of W. Peden W. Peden
    13. December 2012 at 06:34

    Well, we managed to mess up monetary targeting, exchange rate pegging, and inflation targeting. Here’s hoping we don’t do the same to NGDP targeting and discredit the idea.

    One thing that helped discredit those three was constantly changing the object of the target, e.g. from broad money to to multiple aggregates to narrow money to multiple aggregates again; from shadowing the DM to the ERM; from RPI to CPI to core CPI to whatever we’re supposed to be targeting now.

  29. Gravatar of Sarkis Sarkis
    13. December 2012 at 06:51

    MF

    “A private sector business does not take into account future aggregate spending. It takes into account the spending of its own particular market, specifically, the prices of its own particular market. NGDP increasing by X% does not mean every single business will experience an X% increase in sales. Why do MMs keep repeating the same errors over and over?”

    Of course it does. Not saying that aggregate spending is the main determinant but it definitely matters. You make it sound like aggregate spending is irrelevant when actually it is relevant!

    You make it sound like markets are isolated when they are connected to each other.

    You are talking about 19th century style economies when we are in the 21st century.

    Expected future demand (determines investment along with expected future rates) depends on aggregate spending expectations as well.

    And by the way government borrowing should not be affected by central bank OMOs. If it does then you are absolutely right that it will lead to worse deficits and high future inflation. The central bank should help the economy stabilise (avoid nominal shocks) while the treasury balances the books. Right?

  30. Gravatar of Major_Freedom Major_Freedom
    13. December 2012 at 07:27

    Sarkis:

    Of course it does. Not saying that aggregate spending is the main determinant but it definitely matters. You make it sound like aggregate spending is irrelevant when actually it is relevant!

    Sarkis, serious question: Have you ever worked, at any private business, at any time, ever in your life, where you were privy to financial decisions at the upper levels?

    I’ve had roughly 10 or so different financial positions over my career, all of them at a high enough level such that I was privy to financial planning, and not one, NOT ONE, of any of the places I worked at ever took into account aggregate spending levels. Ever. It wasn’t even mentioned, let alone actually integrated into future planning.

    While this is purely anecdotal, I can also tell you that in all my formal economics and finance education, when I learned company valuations, equity pricing, bond pricing, capital structure, forecasting, risk management, econometrics, etc, never in any of my classes has there ever been any integration of aggregate spending into any of the models. Ever. Not once. It was not even on the radar. The only time aggregates were even mentioned was in intro level economics, and the users of said models were always said to be helpful to “policy makers.”

    You make it sound like markets are isolated when they are connected to each other.

    See this is the problem with you MMs. You don’t understand the counter theories that stand in opposition to MM. You have an inkling that companies and individuals are connected in some way in the division of labor, monetary economy. But you don’t understand how coordination actually takes place. You think that the only way coordination at the individual level can take place in a monetary economy is if every individual was guided by, and aware of, and user of, a single…what you might call an intelligence, or consciousness.

    For you the God is NGDP. You believe that NGDP is the causa sui, and from that, each and every individual market actor utilizes it to determine their particular place in the economy, and to determine their particular spending in the present. You believe that if NGDP growth is going to go up by 1% next year, that somehow this single information will be absorbed by every individual actor, such that Mr. Smith adds 0.000234% to his current spending, while Mr. Jones adds 0.000575% to his current spending, and they each take into account the other’s expected “share” of future NGDP when deciding how much additional spending each will engage in the present.

    It’s like you think if NGDP goes up by X%, that each and every producer, seller, wage earner, and investor will each increase their current spending by an amount unique to themselves, calculable from the NGDP growth statistic.

    Your approach is completely backwards. NGDP is a product, an effect, an outcome, of individual spending decisions that are actually coordinated according to relative prices and spending. It is not the cause of individual spending decisions.

    Targeting NGDP from a central location will only “succeed” in altering these relative prices and spending decisions away from actual marginal valuations of real goods and services, because the money enters the economy at distinct points, not everywhere via helicopter drops (and even if the money was dropped by helicopter, it would still change relative prices and spending).

    You are talking about 19th century style economies when we are in the 21st century.

    You are talking about 3rd century style epistemology and economics, when we are well past both the 3rd century.

    States manipulating the currency dates back to ancient Greece.

    Thinking singular ideal conceptions are a causa sui dates back to the neoPlatonists of the 3rd century.

    Expected future demand (determines investment along with expected future rates) depends on aggregate spending expectations as well.

    You find me a single business who takes into account aggregate spending (and no funny business of communicating it as higher CPI), but aggregate spending as such, and I’ll believe you.

    But in my entire work experience, and educational experience, and everyone I have ever known in business and education, (which was pretty standard and so I will infer that most other schools and financial institutions utilize the same basic concepts), what you are saying is imaginary hoolabaloo.

    And by the way government borrowing should not be affected by central bank OMOs. If it does then you are absolutely right that it will lead to worse deficits and high future inflation. The central bank should help the economy stabilise (avoid nominal shocks) while the treasury balances the books.

    “Should not” is not the same as “Will not.”

  31. Gravatar of Think the Fed has been too timid? Check out Britain and Japan. Think the Fed has been too timid? Check out Britain and Japan.
    13. December 2012 at 07:42

    [...] Treasury sounds willing to entertain Carney’s ideas about monetary policy. Sumner, for one, is excited about the [...]

  32. Gravatar of ssumner ssumner
    13. December 2012 at 07:59

    Richard W, Isn’t British government spending higher as a share of GDP than Germany? I thought it was in the 45% – 48% range. What’s distinctive about Britain is not the low level of public spending (it’s not low), but the fact that a high level of spending produces inferior quality public goods (much like the US, although of course we spend considerably less.)

    Shining Raven, You said;

    “I believe that this is quite naive, since there is certainly going to be a lot of lobbying at the Fed as soon as it starts to buy assets beyond treasury bonds.”

    I’d rather the Fed not buy anything more than Treasury bonds–negative IOR or a higher NGDP target are better options than purchases of non-Treasury assets. The quote you cite was a reductio ad absurdum argument. I don’t seriously contemplate the Fed buying goods and services. That would certainly be fiscal policy. But I would oppose that. If they ran out of Treasury securities, I’d inject the money by purchasing other highly liquid bonds.

    JN, I don’t ever endorse anyone as the saviour. If he doesn’t do NGDPLT I’ll criticize him, just like any other central banker. What’s interesting here is how the climate of opinion is gradually shifting in the 4 big central banks. It’s a real sea change in attitudes toward money policy. And the change is accelerating.

    W. Peden, I think the main problem with money, exchange rate, and inflation targeting is that they are bad ideas. Even if the BOE hit them perfectly the economy would have done poorly.

  33. Gravatar of Sarkis Sarkis
    13. December 2012 at 08:08

    MF

    Right..well I am not sure about which kind of spending you are talking about but I specifically mentioned investment. Let us model an investment decision in the simplest way possible by a firm (could be one of the firms that you were employed at).

    In simple terms the firm will invest if the net present value (NPV) of the investment project is positive right? Now the NPV depends on expected future demand. If expected future demand is high then more NPVs will be positive and investment will increase on average. The same can be said about expected future rates (or long term interest rates). The lower they are investment will be higher as more NPVs will be positive. Thus, monetary policy affects investment via expectations.

    Obviously each firm will produce at MR=MC at the micro level, but how do you link that to investment? Also yesterday you disputed the fact that firms will hire more people in the short run if the real wage decreases which has microfoundations. So you resort to micro whenever it suits you apparently.

    I think you are resorting to imaginary hoolabooloo economics not me. Thanks for calling me MM but presumably to be considered MM you have to publish in peer reviewed journals in this field. My current specialisation is in microeconomics.

  34. Gravatar of Morgan Warstler Morgan Warstler
    13. December 2012 at 09:01

    Raven is of course correct…

    Which is why I think MM should run in the opposite direction as MMT, and advocate for a pro-market solution to the FACT that this is fiscal policy as soon as Fed starts buying other stuff.

    Since big business = big big government = less free market…

    The Fed should encode smallness into economy and run the NGDP Futures market to favor SMBs and let them have the new money first:

    http://www.morganwarstler.com/post/37140255525/who-gets-the-new-money

  35. Gravatar of Major_Freedom Major_Freedom
    13. December 2012 at 09:26

    Sarkis:

    Right..well I am not sure about which kind of spending you are talking about but I specifically mentioned investment. Let us model an investment decision in the simplest way possible by a firm (could be one of the firms that you were employed at).

    In simple terms the firm will invest if the net present value (NPV) of the investment project is positive right? Now the NPV depends on expected future demand. If expected future demand is high then more NPVs will be positive and investment will increase on average. The same can be said about expected future rates (or long term interest rates). The lower they are investment will be higher as more NPVs will be positive. Thus, monetary policy affects investment via expectations.

    Higher NGDP does not mean every individual firm will experience higher revenues, nor does it mean every individual firm will be affected to the same degree.

    You are talking about aggregate spending on the one hand, but you are not actually connecting it to individual firm spending on the other. You’re just explaining NGDP and then you are saying that firms invest if their particular NPV alternatives are positive. The statement “Thus, monetary policy affects investment” is true in itself, but it does not follow from what you said, nor does it show what you think it shows.

    Obviously each firm will produce at MR=MC at the micro level, but how do you link that to investment?

    The question I am asking is how are you linking individual firm decisions to aggregate spending. So far you have not done this.

    Also yesterday you disputed the fact that firms will hire more people in the short run if the real wage decreases which has microfoundations. So you resort to micro whenever it suits you apparently.

    No, I disputed the claim that firms hire more people on the basis of falling real wages. I said unemployment falls when there is a tendency towards equilibrium of nominal demand for labor and labor prices. Whether or not real wages go up or down is secondary.

  36. Gravatar of RebelEconomist RebelEconomist
    13. December 2012 at 09:31

    “What’s distinctive about Britain is….the fact that a high level of spending produces inferior quality public goods”

    Really? I believe that the largest item of UK public expenditure is the National Health Service, and that is generally well regarded by the British public – hence its mention in the Olympic opening ceremony.

    Of relevance to this post, I would say that in the areas in which UK public services are worst, notably education, the cause is often a reluctance to hold a line that will disappoint people – eg in the case of education, by upholding consistent exam standards. And this is exactly the danger with monetary policy objectives – that the government will back down on a policy that enjoyed widespread support when it allowed rising asset (house) prices but now requires sacrifice, making us poorer in the long run.

  37. Gravatar of Sarkis Sarkis
    13. December 2012 at 09:57

    MF

    “Higher NGDP does not mean every individual firm will experience higher revenues, nor does it mean every individual firm will be affected to the same degree.

    You are talking about aggregate spending on the one hand, but you are not actually connecting it to individual firm spending on the other. You’re just explaining NGDP and then you are saying that firms invest if their particular NPV alternatives are positive.”

    I think that you have the tendency to ignore details that don’t suit your point of view. I didn’t try to connect NGDP to current revenues. I also spoke of effects on average and of course we allow individual firm variation (anyway this is not relevant if total investment increases).

    My argument is not about firms experiencing higher revenues but about firms’ expectations of future revenues. (your confusion lies here)

    If the (future) state of the economy is perceived as positive then expected future demand rises. If you don’t believe me call all your ex-bosses and ask them if they believe that future individual demand is correlated with the general state of the economy. If you understand that and if you understand the role of expectations then you might come to see that MMs may be right after all.

    Sorry but it sounds like you prefer an economy with high unemployment and low investment for purely dogmatic reasons. I’m baffled.

  38. Gravatar of Major_Freedom Major_Freedom
    13. December 2012 at 11:00

    Sarkis:

    I think that you have the tendency to ignore details that don’t suit your point of view. I didn’t try to connect NGDP to current revenues.

    I said:

    “A private sector business does not take into account future aggregate spending.”

    You replied:

    “Of course it does.”

    Then I asked you to explain, and you proposed a model of an individual firms investment decisions, and then you concluded with the ex cathedra pronouncement “Thus, monetary policy affects investment via expectations.”

    Now you’re saying you are not trying to connect NGDP to individual firm decisions?

    I also spoke of effects on average and of course we allow individual firm variation (anyway this is not relevant if total investment increases).

    Not relevant? You can’t see any relevance to questions concerning relative over and under investment? That there is no relevance to housing investment increasing beyond a rate that would be physically sustainable, because there are too many investments elsewhere that require the needed resources?

    Yes, you did mention “on average”, but that is not something I challenged. Of course if NGDP goes up, then statistical averages that concern NPV will go up. My question however deals with an issue that does not treat all firms as conceptually homogeneous, where if only we can increase the percentage of individual firms making profitable investments, that somehow monetary policy is helping the economy. Yes, more profitable investing is a good thing, but it is only good contingent upon each heterogeneous firm being in balance with one another, in terms of resource and labor usages and requirements. One part of the population of firms physically depends on other firms, and those firms physically depend on still other firms, etc. If too many mining firms are expanded, say, and not enough commodities firms are expanded, then the relationships will get out of whack in the physical sense, apart from nominal spending. Money isn’t the end. It is a means to exchange. If firms are not in the correct proportions, then the physical resource allocations will become bottlenecked, overstocked here and understocked there, too much labor here and not enough labor there, and so on.

    My question to you is the connection between NGDP and individual firm decisions. You couldn’t connect it. All you did say was that the average number of firms will have increased NPVs. Well sure, but that doesn’t address what I am asking. You said initially that every individual firm owner takes into account aggregate spending. I challenged you on that point, but you have since abandoned it.

    My argument is not about firms experiencing higher revenues but about firms’ expectations of future revenues. (your confusion lies here)

    Distinction without a difference. Yes, they are different, but this difference doesn’t change my argument, or even apply to it. If you want to talk about expected revenues, then fine, I will just use different semantics and say that individual firms do not take into account expected future aggregate spending, and I challenge you to show me that they do. I can only tell you of my anecdotal experience, and in my experience, there has never been a mention of it, let alone a use of it in planning.

    If the (future) state of the economy is perceived as positive then expected future demand rises.

    No, only if the quantity of money rises can aggregate spending rise. Expectations of positive futures does not imply expected nominal growth sales. It could, but it is not necessary. Aggregate nominal demand can be fixed, and yet economic growth and nominal profitability can remain positive, on the basis of falling prices and costs, as more is produced. Higher nominal sales can be viewed as individual firms gaining relatively more than their competitors, and in that sense higher revenues is equated with positive business management, but that does not mean that higher aggregate spending means everyone will experience higher revenues, nor does it mean that there is more real production and higher standards of living. It is only necessarily connected to enough firms earning higher revenues to make the total go up. It doesn’t mean every firm’s sales go up, and it doesn’t mean every firm’s physical expansions are sustainable.

    If you don’t believe me call all your ex-bosses and ask them if they believe that future individual demand is correlated with the general state of the economy.

    Correlated how? For firm X, what is the correlation coefficient? You’re not saying what you think you are saying.

    If you understand that and if you understand the role of expectations then you might come to see that MMs may be right after all.

    Expectations of aggregates is not the same thing as expectations of individual firms.

    Sorry but it sounds like you prefer an economy with high unemployment and low investment for purely dogmatic reasons. I’m baffled.

    Please. If that is what you actually believe, then you’re more dogmatic than I thought.

  39. Gravatar of Major_Freedom Major_Freedom
    13. December 2012 at 11:35

    Sarkis:

    I’m baffled that you want an economy with less employment, lower real wages, and less sustainable investment for purely dogmatic (anti-free market, pro-central planning) reasons.

    http://research.stlouisfed.org/fredgraph.png?g=dLY

    This chart only goes back to the mid 1940s, but it shows that since the early 1970s, wages as a percent of GDP (i.e. “wage share of national income”) has persistently fallen.

    Inflation benefits the wealthy at the expense of the poor, because it usually enters wealthy people’s bank accounts before the poor’s bank accounts.

  40. Gravatar of Morgan Warstler Morgan Warstler
    13. December 2012 at 12:45

    Scott,

    “I’d rather the Fed not buy anything more than Treasury bonds–negative IOR or a higher NGDP target are better options than purchases of non-Treasury assets.”

    Even though MBS are US backed, would you then prefer that the Fed ONLY buy T-Bills?

    I’m asking because it seems like there’d be a better freer market in housing if the Fed didn’t touch mortgages.

  41. Gravatar of You’re doing God’s work Mark Carney « Good Morning, Economics You’re doing God’s work Mark Carney « Good Morning, Economics
    13. December 2012 at 15:07

    [...] | Tags: monetary economics It’s probably hard moving his family to England from Canada to go work at the Bank of England, but the world is better for it. Like this:LikeBe the first to like this. [...]

  42. Gravatar of ssumner ssumner
    14. December 2012 at 20:27

    Rebeleconomist, You said;

    “Really? I believe that the largest item of UK public expenditure is the National Health Service, and that is generally well regarded by the British public”

    It must have improved a lot since the last time I used it.

    Morgan, I don’t care much either way with regard to MBSs—they are already effectively Treasuries.

  43. Gravatar of Negation of Ideology Negation of Ideology
    15. December 2012 at 08:50

    Razer – “It seems to appeal to Scott and monetarists because it appears to leave out the messy political process necessary for fiscal policy done by Congress. ”

    Morgan – “Even though MBS are US backed, would you then prefer that the Fed ONLY buy T-Bills?”

    These two quotes go together. The Fed doesn’t decide what the Treasury backs or spends money on. Congress does (or at least it authorizes the Treasury to do it.) When the Fed buys T-Bills, it is buying back debt from past Congressional spending. When it buys government backed MBS or student loans, it is buying debt that Congress has made the decision to back. It’s not the Fed’s job to overrule Congress. If you don’t think we should be backing MBS or student loans, complain to Congress – it’s not the Fed’s problem.

    The Fed should buy any Treasury backed debt based on term, yield, liquidity, etc. Now, a related question is what to do if the Fed runs out of government bonds and government backed debt to buy. I suggest we all first dance a celebratory jig. Then we can probably buy up some state bonds with future federal aid as collateral. But, really, we are a long way away from that “problem”.

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