Osborne is relying on the so-called “Sumner Critique”

Of course the “Sumner critique” is not really my idea, the standard NK model circa 2007 implied a fiscal multiplier of zero.  At best I expressed the idea a bit more colorfully (fiscal “multipliers” are nothing more than estimates of central bank incompetence), and did so in 2009 when almost everyone seemed to have forgotten NK economics, circa 2007.

Here’s The Telegraph:

“I think there will be quite a few changes,” said Michael Saunders, an economist at Citi, such as a more flexible inflation target, setting clear signals on how long interest rates may remain low, more bond-buying and, possibly, a rate cut.

That kind of approach has raised eyebrows at the Bank of England. Several top officials have said it is not needed for Britain, in part because of concerns it could stoke the country’s persistently above-target inflation.

Mr Carney also stirred controversy in December by saying that, in times of crisis, central banks might consider targeting a mix of inflation and growth rates instead of just inflation.

While Mr Carney speaks in Westminster, Sir Mervyn will be chairing one of the final Monetary Policy Committee meetings of his term. The MPC is not expected to expand its bond-buying programme.

But, the day before the Bank of England’s monetary policy committee announces the outcome of its monthly meeting, the Chancellor put the pressure on the bank to take action, the Financial Times reported.

Mr Osborne said decisive moves by the government on the deficit “means that…monetary policy action by the BoE can and should continue to support the economy”.

He was speaking at the launch of the Organisation for Economic Co-operation and Development’s report on the UK economy, which said the Bank of England may need to carry out more money-printing to stimulate the economy.

The Chancellor hopes that Mr Carney will persuade the Bank to take a more active stance in supporting the recovery.

All the Very Serious People in Britain are reacting with shock and horror at the idea of NGDP targeting.  Here’s a tip as to whether you are reading someone who is absolutely clueless on the subject—they’ll say; “An NGDP targeting regime would force the central bank to estimate the trend rate of RGDP growth.”

So Carney is backing off a bit, and talking about flexible inflation targeting, which is a slightly less effective form of NGDP targeting, without the ugly four letter acronym.

Osborne is hoping that the BoE will offset fiscal austerity.  So does the Labour Party.  So do the Liberal Democrats.  So do most of the British people.  But NGDPLT is one of those ideas that policymakers dare not speak its name.  Thus we have the bizarre situation where Osborne:

1.  Has the duty of telling the BoE exactly what they are supposed to do.

2.  Wants them to do NGDPLT.

3.  Dare’s not tell them he wants them to do NGDPLT.

4.  Hopes that Carney will see the winks and the nods and do it anyway.

After all, when you pay a central banker a million dollars a year you’d expect, at a minimum, that he can recognize when the Chancellor of the Exchequer is winking at him.  The real question is whether Carney can convince his colleagues, who can pretend not to see the winks.



17 Responses to “Osborne is relying on the so-called “Sumner Critique””

  1. Gravatar of marcus nunes marcus nunes
    8. February 2013 at 10:44

    Krugman (mostly) says MP is powerless. “WE need more FS”. MMs say you need more spending (NGDP) and many go bezerk about inflation targeting been thrown out the window, coming up with lame (stupid?) arguments against NGDPLT.
    In Canada Mark Carney was ‘blunt’. During his Q&A yesterday he was diplomatic (evasive).
    Europe is being ‘defeated’ in the “currency wars”.
    In the US some worry more intensively about new “bubbles” being blown and the constraints this should put on MP.
    All in all 2013 promises to be an interesting year.

  2. Gravatar of Tyler Joyner Tyler Joyner
    8. February 2013 at 11:01

    Isn’t one of the reasons you argue for NGDP targeting because it has less of a negative association than inflation? What happened to that?

  3. Gravatar of ssumner ssumner
    8. February 2013 at 11:26

    Marcus–yes, 2013 could be decisive.

    Tyler. I argued back in 2010 that Bernake’s QE2 would have been less unpopular if he’d told the American people that he favored raising their incomes, rather than raising their cost of living. I still believe that.

    The VSPs are another matter.

    In addition, I was holding the average rate of inflation constant, whereas the VSPs oppose NGDP targeting because they see it as a way to raise the average rate of inflation.

  4. Gravatar of Jim Crow Jim Crow
    8. February 2013 at 11:29

    I can’t do enough back flips or stand on my head long enough to figure out what Chancellor George Osborne does or does not want so I’m still holding out hope for Abenomics in Japan to kill this Zero Lower Bound nonsense once and for all. Go Go Nikkei!!

  5. Gravatar of James in London James in London
    8. February 2013 at 14:04

    The power of central bankers is truly awesome to behold. Draghi (even if he is actually tool-less), Abe (even as he waits for his new pick to arrive), Carney (even though he isn’t arriving for several months).

    But they are too powerful. If they are good they are great, if they are bad they are very very bad. And power seems to sometimes freeze them, too. They seem crushed by the responsibility and get hung up on losing credibility to, the exclusion of all else.

    I can see why you prefer a robot blindly targeting the market’s own forecasts for NGDP growth. It won’t be so interesting but could take the drama and stress and failure out of monetary policy.

  6. Gravatar of W. Peden W. Peden
    8. February 2013 at 14:17

    James in London,

    One of the points that Barnett makes and documents in “Getting It Wrong” was how a cult of Greenspan (a professional self-salesman turned banker) encouraged gross complacency, not only within central banking and about central banking, but regarding the general assessment of the non-ephemeralness of stability on the part of the private sector. People made bets on asset prices thinking that, whatever happens, Greenspan and his successors have solved that nasty asset-crash problem and all without notable inflation.

  7. Gravatar of Rademaker Rademaker
    8. February 2013 at 14:23

    The main issue I have with NGDP targeting is that I’m not convinced that when real interest rates are allowed to fall well below zero, they ever rise again from there as opposed to resuming their 30 year falling trend. I don’t doubt that at some point the negative real rates induce borrowing in the private sector again, but what happens when the credit expansion is of the ponzi-financing kind that we’ve seen so much of in the last +/- 15 years? Do you ramp up the stimulus again when the whole thing goes bust?

  8. Gravatar of ChargerCarl ChargerCarl
    8. February 2013 at 14:27

    W. Peden,

    That seems like a plus to me. The problem this time is because we frame monetary policy through interest rates, and still target 2% inflation, we handicapped ourselves from restoring AD to a sufficient level. No need to throw the baby out with the bathwater.

  9. Gravatar of Kevin Dick Kevin Dick
    8. February 2013 at 15:39

    Your last several paragraphs are downright (Robin) “Hansonian”!

  10. Gravatar of ssumner ssumner
    8. February 2013 at 19:03

    Thanks Kevin,

    Rademaker, You just keep NGDP plugging along, and let the rest take care of itself.

  11. Gravatar of Saturos Saturos
    8. February 2013 at 19:41

    A “mix of inflation and growth rates”? I still blame ourselves for this.

    I don’t think it’s fair to call them clueless. Most people disagree with you and think that inflation matters independently of NGDP. Then you need to estimate trend RGDP growth in order to hit your desired implicit inflation target.

    Isn’t a flexible inflation target a *lot* less effective?

  12. Gravatar of James in London James in London
    8. February 2013 at 23:11

    W Peden
    It’s moot what Greenspan might have done in if he was still there in 2009. A bit like asking what Milton Friedman might have said. It is possible Greenspan wouldn’t have been as slow to react as Bernanke, and less worried about inflation. He was good at working with expectations, a master in fact. Better to have a simple NGDP forecast target and do away with the cult of personality.

    You can have a recovery with zero credit growth, or even less credit. all that creditvstuff is just fiscalist-minded banker propaganda, and totally self-serving. The NGDP argument is about money circulation not credit.

  13. Gravatar of Rob Rob
    9. February 2013 at 08:30

    It’s politics. Osborne lacks credibility – he’s young for someone in such a senior position, has no particular background in economics (he studied history at university and is basically a career politician) and isn’t particularly popular. He’s widely acknowledged as a good strategist for the Conservative party and the only real reason he holds the Treasury brief is that it’s widely seen as the most important office after that of the Prime Minister.

    Sir Mervyn King, in contrast, is a respected academic economist and long-serving head of the Bank of England. He has been very clear and consistent in his views for some time, and has shown no particular reticence in sharing those views, even when they concern matters that are more rightly the domain of the Chancellor (see here for example: http://www.guardian.co.uk/business/2010/apr/29/mervyn-king-warns-election-victor ). He has, for some time, held the belief that austerity is inevitable, that it has to hurt, and that even if the Bank could do something to help, there are limits on how far that help should go.

    So long as King remains in office, Osborne is stuck. He can’t do anything to contradict King, because he simply doesn’t have the credibility to do it, and he is afraid of the political and economic repercussions. Right now he has very few friends and the only good story he can tell about his time as Chancellor is “at least I cut spending like Mervyn King told me to”.

    I suspect (hope?) that once King is gone and the more flexible Carney is in place, Osborne can change his tune very quickly.

  14. Gravatar of ssumner ssumner
    9. February 2013 at 11:05

    Saturos, Yes, but don’t you think they ought to at least read the arguments in favor of the proposal, before dismissing it out of hand? They don’t even bother to explain why NGDP is not a better proxy for the welfare costs of inflation, than inflation itself. That’s our claim! They haven’t done their homework, which is what I meant by “clueless.”

    Flexible inflation targeting may not be that bad, but only when combined with “target the forecast.”

    Rob, Thanks for that info. Any thought on the rumors a few years back the the BoE was secretly interested in NGDP? I presume it wasn’t King.

  15. Gravatar of Negation of Ideology Negation of Ideology
    9. February 2013 at 15:32

    “Flexible inflation targeting may not be that bad, but only when combined with “target the forecast.””

    Is “level targeting” more important than “targeting the forecast”? For example, I believe you’ve said inflation has only averaged 1.2% per year over the past 5 years. That means the price level is 4% below the 2% per year target. Having the “catch up” inflation then would require 6% if we do it in one year, or perhaps 4% inflation for two years. Of course, that would result in an increase in NGDP.

    Or to put my question another way, would you agree with this ranking? (from best policy to worst):

    1. NGDPLT
    2. PLT
    3. NGDP Growth rate targeting (with no catch up)
    4. Inflation targeting (with no catch up)

    I believe current policy is somewhere close to 3, perhaps unintentionally.

  16. Gravatar of ssumner ssumner
    10. February 2013 at 13:16

    Negation, It’s hard for me to compare them without more specifics. I was talking about flexible inflation targeting, which is not on your list. Looking a your list, I’d want to know haw badly they deviate from “target the forecast” before judging lesser of evils.

    Sorry I can’t be more specific.

  17. Gravatar of Britmouse Britmouse
    11. February 2013 at 16:35

    What do you mean specifically by “flexible IT”, Scott, where the CB shifts desired inflation to minimize the “output gap”? Central bankers seem to use “flexible inflation targeting” to mean any inflation forecast-targeting regime where you don’t try to keep inflation right on target at all time.

    I think Charlie Bean is the guy at the BoE with an NGDP focus, he wrote that 1983 paper on nominal income targeting is widely cited. When the Bank did QE in 2009 they framed it in terms of boosting NGDP; I think that is Bean’s work.

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