A time for nuance

Macroeconomics is really complicated.  I would consider myself a supply and demand-sider, a rational expectations and efficient markets guy, and a market monetarist.

So it’s not surprising that I am often misunderstood, just as more famous bloggers like Paul Krugman are often misunderstood.  When things are far out of whack, as in 2009, it’s much easier to be understood.  You simply need to pound the “monetary stimulus” theme with a sledgehammer.  No nuance required.  As the economy gets closer and closer to the natural rate of unemployment (and we are only about 6 months away), the issues get more and more complicated. Here are some things I find that I need to continually address in comment sections:

1.  Real shocks matter, even when demand is a problem.  If someone with cancer gets stabbed by a mugger on the way to the hospital, they have multiple problems.  Which problem is worse?  Well the stab wound is more acute, but the cancer is a bigger problem in the long run.  A demand shortfall may be more acute, but like a stab wound is more easily treated than structural problems. When an economy has severe structural flaws, a policy of monetary stimulus will not fix the country’s problems.  It will just fix one of them, leaving the more severe problems in place.

2.  Contrary to the recent claim of the New York Times, the definition of a recession is not 2 consecutive quarters of falling RGDP.  The US had a recession in 2001, but we did not have two consecutive quarters of falling RGDP, whereas Japan may have recently seen two consecutive quarters of falling RGDP, but is not in recession.  Economists look at many factors before determining whether a recession has occurred.  Recessions are periods where output falls well below trend.  It matters a lot whether the trend rate of RGDP growth is 7% (China) or zero percent (Japan.)

3.  Monetary offset works by adjusting the long run expected rate of growth in nominal aggregates (such as inflation or NGDP) to offset the effect of fiscal actions.  It is not capable of smoothing out high frequency fluctuations due to real shocks.  A sudden change in government spending, sales tax rates, or a natural disaster, will affect RGDP in the near term, even if monetary policy is offsetting any effects on NGDP 12 or 24 months out in the future.

4.  A failure to achieve RGDP growth and a failure to achieve NGDP growth are logically distinct events.  Don’t confuse them. Many economists use the wrong data when evaluating policy success. If you are making the Keynesian argument that monetary stimulus is incapable of boosting AD, you use NGDP data.  If you are making the Real Business Cycle (RBC) argument that monetary stimulus will not boost output you use RGDP data.  Many Keynesians seem to be oblivious to the distinction between a change in aggregate demand and a changed in the aggregate quantity demanded (caused by a supply shock.) For instance, the April 1 sales tax increase sharply depressed Japanese RGDP in Q2, leaving NGDP almost unchanged.  Keynesians don’t seem to realize that when they complain about slow RGDP growth in a country with high inflaiton (like Britain a few years back) they are making a RBC argument, which tends to discredit the Keynesian model.  There are lots of ways that policy can “fail.”  If you don’t know the right data to cite to make your point, no serious economist will pay attention to your arguments.

Furthermore, the EMH says the efficacy of policy is evaluated at the point it is announced (if a surprise) not after the fact.  There is no “wait and see to ascertain whether Abenomics worked.”  It was obvious from the get go that it would “work” in a limited sense, but fail to achieve the announced goals.  And it has.  If Japan wants to boost trend RGDP growth, then they need to adopt supply-side reforms.  Printing money doesn’t solve that problem, especially in a country with 3.6% unemployment.

5.  Rational expectations theory says that monetary policy cannot be evaluated in isolation, but rather must be considered in the context of a clearly spelled out policy regime.  Admittedly, when things are clearly far off course, (as in 2009) you can assume monetary policy is too tight under any plausible policy regime.  But not today.  For instance, I could easily construct plausible arguments for money being either too easy or too tight:

a.  Too tight:  Because we are likely to hit the zero bound in the next recession, policy should be more expansionary, to promote a trend rate of NGDP growth high enough to keep us away form the zero bound.

b.  Too easy.  NGDP growth is likely to average a bit over 3% over the next few decades, given the Fed’s inflation target.  In recent years it has run a bit over 4% per year.  If it keeps that up it will later have to be offset with sub-3% NGDP growth, perhaps leading to recession.  Inflation should be low during booms and high during recessions.  Yet Janet Yellen seems to be determined to raise inflation up to 2%, probably getting there near the peak of the business cycle.

Which do I believe?  Neither.  I don’t know what’s optimal until I’m told what sort of objective the Fed has in the long run.  Tell me their long run NGDP target, and I’ll tell you whether money is too easy or too tight today.

It’s much better to live in a place like Switzerland where the problems are complex and the solutions are unclear, rather than North Korea where the problems are simple and the solutions are straightforward.


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63 Responses to “A time for nuance”

  1. Gravatar of Greg Ransom Greg Ransom
    23. November 2014 at 12:25

    Macroeconomics is really complicated — esp when you eliminate the interrelated valuation of individual production goods or rival products times and you eliminate the changing liquidity and valuation of physical and finanicial assets. Oh, actually it is impossible.

    It was impossible to produce a sound explanation of the origin of species assuming species and adaptations were fixed Platonic or Aristotelian kinds — and it is impossible to produce a sound macroeconomics assuming whole-economy aggregates like “capital”, “demand”, “supply” & “money” directly interact with one another.

    They don’t.

  2. Gravatar of Effem Effem
    23. November 2014 at 12:35

    And what if treating the short-term crisis (the stab wound) worsens the long-term issues (the cancer)? As best I can tell that possibility is not considered in the solution set.

  3. Gravatar of Larry Larry
    23. November 2014 at 12:48

    Found this. Interesting.
    http://www.syloslabini.info/online/wp-content/uploads/2014/11/Appello-Inglese.pdf

  4. Gravatar of Brett Brett
    23. November 2014 at 13:17

    1. I’d add that monetary policy can actually reveal some of the structural problems in your economy in ways that might not be apparent. If prices are shooting upwards at a relatively high unemployment rate, then you know you’ve got capacity-building problems or the like. I remember Ruchir Sharma making that point about Brazil.

    4. I don’t get this one. You can’t assume that all parties in the economy are equally aware of how a change in policy might affect them at the point when it’s announced.

  5. Gravatar of W. Peden W. Peden
    23. November 2014 at 13:53

    Brett,

    Good point. One of the great things about a steady NGDP growth rate is it helps reveal which economies do and do not have underlying structural problems.

  6. Gravatar of Ashton Ashton
    23. November 2014 at 14:04

    Somewhat unrelated, but I haven’t been able to find much information on the internet apart from an article by J.R. Hummers, but why does the Taylor Rule fall down?

    NGDP-LT is superior because of simplicity and the TR falls down when interest rates hit 0, but other than this are there any other reason it isn’t suitable?

  7. Gravatar of Major.Freedom Major.Freedom
    23. November 2014 at 14:26

    Sumner:

    “Contrary to the recent claim of the New York Times, the definition of a recession is not 2 consecutive quarters of falling RGDP.”

    Yes it is.

    https://www.google.com/?gfe_rd=cr&ei=2l1yVNWJB6vE8ge_8oC4Aw&gws_rd=cr#q=definition+of+recession

    “The US had a recession in 2001, but we did not have two consecutive quarters of falling RGDP”

    Then we did not have a recession.

    “Recessions are periods where output falls well below trend.”

    You’re just trying to introduce a new definition of recession because you know the old one no longer serves your political agenda. You are purposefully trying to mislead people into agreeing with you again.

  8. Gravatar of Don Geddis Don Geddis
    23. November 2014 at 14:32

    @Ashton: You already caught a big one, which is a ZLB problem with a policy that depends on setting interest rates. A second problem is the focus on inflation, which fails to distinguish between supply-side and demand-side shocks to the economy. A better macroeconomic policy would offer different responses to qualitatively different kinds of shocks.

    You might find it insightful to read Nick Rowe’s analysis that, in 2008 (in Canada), inflation actually stayed close to target, it was only NGDP that showed the huge monetary policy failure. Inflation targeting (which is a major component of the Taylor Rule) is the dog that didn’t bark.

  9. Gravatar of benjamin cole benjamin cole
    23. November 2014 at 16:07

    Excellent blogging.

    I would like to point out that Japan grew rapidly in the 1960s through the 1980s with even worse structural impediments that it has today. But what it did have in those boom years was an expansion-oriented central bank.

    Yes, demographics. But cultures are mutable. With strong demand for labor, we see new entrants into the labor force, such as retirees who become consultants and work several months a year.

    Additionally, I think a good case can be made that tight money results in even stronger structural impediments as people and interest groups cling to whatever resources they can command through the political process.

  10. Gravatar of ssumner ssumner
    23. November 2014 at 16:38

    Greg, Macro is the study of aggregates.

    Effem, It’s been considered, and rejected as implausible.

    Larry, Why?

    Ashton, When rate are positive and monetary policy is competent, they may be similar. But that’s a big if.

  11. Gravatar of dtoh dtoh
    23. November 2014 at 16:39

    Scott,
    I’m not sure so sure the employment rate is an effective indicator of the the likely efficacy of monetary policy…. especially in Japan where the official rate understates unemployment, gives no indication of changes in the participation rate, where labor regulations require employers to keep workers even when they have nothing to do, and where many people are employed in low productivity part time jobs.

    Higher asset prices (i.e. lower capital costs) should in general have the effect of moving workers to higher productivity jobs thereby increasing output and stimulating demand.

    I think you need to look beyond the unemployment number to whether the economy has the ability to easily increase output.

  12. Gravatar of dtoh dtoh
    23. November 2014 at 16:44

    Benjamin Cole,
    I don’t think Japan had higher structural impediments in the past. One of (if not) the primary problem right now is a confiscatory tax regime. Because of non-compliance, effective tax rates (especially for small businesses) were very low in the 60s.

  13. Gravatar of Major.Freedom Major.Freedom
    23. November 2014 at 16:48

    Money is too tight when the rate of money growth is less than what a free market would have generated.

    Money is too loose when the rate of money growth is more than what a free market would have generated.

    Never reason from a spending change. A free market would not have unlimited volatility in money supply and rigid aggregate spending increases.

    I see no reason why there cannot arise a relatively high savings in cash in a free market of money, so as to absorb demand effects from volatility in cash preference. Wage rates and prices would be very low relative to the quantity of money owned.

    This would allow for spending changes to actually have an effect on resource allocation at the international level. NGDPLT in cenrral banking would prevent country-wide malinvestments from being corrected.

    The definition of tight money and loose money is based on the free market, not armchair proselytizing from a socialist ideology.

    Just because socialist money is being enforced, it does not mean that economic laws have changed or that the ground for our thinking must become socialist as well.

    Don’t worry, the world is not going to suffer from you becoming a free market economist. You might, and so it is understandable how what is good for the world should be sacrificed for what is good for you personally. That is why socialism is after all. Sacrificing other people’s health and well-being for the sake of one’s own preferred social plan.

  14. Gravatar of Greg Ransom Greg Ransom
    23. November 2014 at 20:33

    Scott, Europeans biologists into the 20th century defined biology as the study of Platonic natural kind species and Aristotelian functional essential types.

    Bad definition enforcing false, impossible pictures of real world mechanisms kill the advance is science.

    “Science” by definition fiat is a scientific train wreck.

  15. Gravatar of Greg Ransom Greg Ransom
    23. November 2014 at 20:35

    Scott, what the hell is a “study of aggregates”? You can’t coherently tell me.

    The aggregate “dogs” does not interacts with the world as an aggregate.

    Production goods do not interact with the world as an aggregate.

    You are stipulated impossible-mechanism pseudo-science by definitional fiat.

  16. Gravatar of Ashton Ashton
    24. November 2014 at 00:02

    Greg, I’d imagine the interaction of the dogs is coherent enough to form an aggregate piece of datum, even if you’re aggregating separate entities.

    Or are you opposed to any sort of non-atomistic data completely?

  17. Gravatar of Maurizio Maurizio
    24. November 2014 at 00:26

    If Japan wants to boost trend RGDP growth, then they need to adopt supply-side reforms. Printing money doesn’t solve that problem, especially in a country with 3.6% unemployment.

    You say printing money will not solve the RGDP problem. And it will not solve the unemployment problem (because they don’t have one). But then, what problem will printing money solve in Japan? :)

  18. Gravatar of Maurizio Maurizio
    24. November 2014 at 00:41

    @MajorFreedom

    Money is too tight when the rate of money growth is less than what a free market would have generated.

    MF, do you realize this won’t impress those who think the free market is not optimal, due to sticky wages? So it will fail to produce the optimal quantity of money. So if you write something like the above, they will stop reading right there.

    OTOH, I remember David Friedman saying that competing private currencies would realize exactly the optimal quantity of money according to Milton Friedman, and Milton agreed. Which seems to deny that free markets are not optimal.

  19. Gravatar of Nick Nick
    24. November 2014 at 02:40

    What does the ‘natural rate of undmployment’ mean to a MM? What will happen in six months when we hit it? Inflation will accelerate?
    Or do you just mean, ‘the number some consider to be the natural rate of unemployment’?

  20. Gravatar of W. Peden W. Peden
    24. November 2014 at 04:17

    Maurizo,

    “I remember David Friedman saying that competing private currencies would realize exactly the optimal quantity of money according to Milton Friedman, and Milton agreed. Which seems to deny that free markets are not optimal.”

    That’s too broad a claim as you’ve put it there, because as George Selgin points out even under competing currencies and free banking you still have to have some sort of policy regarding base money. Whether that policy corresponds to the optimal quantity of money depends on the base money policy as well as the performance of the private banking system.

  21. Gravatar of Greg G Greg G
    24. November 2014 at 05:00

    >—” Inflation should be low during booms and high during recessions.”

    You have convinced me that this would be good policy but I think it will always be hard to find political support for. The average person will feel and object to inflation most in times of recession.

  22. Gravatar of ssumner ssumner
    24. November 2014 at 05:57

    dtoh, That’s possible, but I’d expect the effects to be small. Many Japanese firms are short of workers.

    Greg, So the Great Depression is a myth? It never happened?

    Maurizio, It won’t solve any problem, but it will reduce the public debt problem.

    Nick, That’s a good question. What happens next depends on the monetary policy. If NGDP keeps growing at the same rate as in the past 5 years, then I’d expect inflation to gradually increase. But nothing sudden. Or the Fed may slow the rate of growth of NGDP to slightly over 3%.

    Greg G, But the average person won’t complain about Fed policy, as they have no idea that the Fed is the one creating this pattern.

  23. Gravatar of Becky Hargrove Becky Hargrove
    24. November 2014 at 06:22

    Greg Ransom,
    Traditional production goods are a direct wealth aggregate. Non traditional services goods – as currently defined in too many fiscal settings – are an indirect wealth aggregate. The difference matters at the core of budgets, employment and planning in general.

  24. Gravatar of Alex Alex
    24. November 2014 at 06:38

    Hat tip for 1,2 for 3 if correctly understood a real shock will affect RGDP in near term, but the NGDP targeting, what will be during the specific period? In 4 crucial is the difference in data purposes you underline (ht) to understand what we are talking for, but i lost you Professor in the specification of the essence of RBC.
    In 5 hat tip for general antilipsis and distinction. For Japan may be to easy, but for US the Fed’s perception is that NGDP is at 5% (3 and 2).
    But this may be a mistake they should target 6% even with the danger of a higher rate of inflation. Setting 5% NGDP only (my case) will bring the feasibility of that rate, lower.

    In connection with the indroduction, why you set natural rate of uneployment at 5.2% (?) and not lower?

    is the following give a clue?

    http://www.docdroid.net/file/view/ls5g/01.pdf

  25. Gravatar of Philo Philo
    24. November 2014 at 06:40

    You should not shrug your shoulders, saying you don’t know whether monetary policy is too loose or too tight until you know the Fed’s objective. Don’t you know what the Fed’s objective *ought to be*? That is the proper basis for assessing monetary policy.

  26. Gravatar of Maurizio Maurizio
    24. November 2014 at 06:55

    Maurizio, [printing money] won’t solve any problem, but it will reduce the public debt problem.

    So that is the only reason you are advocating easier monetary policy for Japan? To reduce the debt problem? Not to fight deflation and increase RGDP?

  27. Gravatar of Student Student
    24. November 2014 at 07:24

    @Effem

    Is letting the patient die of a stab wound out of fear that treating it might make the cancer worse really an option?

    Perhaps you should stop breathing because air pollution might lead to lung cancer.

  28. Gravatar of TravisV TravisV
    24. November 2014 at 07:44

    Justin Irving wrote the following post on Obama’s immigration action:

    http://economicsophisms.com/2014/11/22/what-a-raw-deal-for-united-statesians

    Given the behavior of U.S. stocks lately, I conclude that Irving’s analysis is paranoid and this is not that big a deal.

  29. Gravatar of Brian Donohue Brian Donohue
    24. November 2014 at 07:48

    very good post Scott!

  30. Gravatar of Robert Robert
    24. November 2014 at 07:56

    “It’s much better to live in a place like Switzerland where the problems are complex and the solutions are unclear, rather than North Korea where the problems are simple and the solutions are straightforward.”

    Is this yours? Great quote. I intend to steal it when I do presentations, if that’s ok?

  31. Gravatar of Student Student
    24. November 2014 at 07:57

    If a CB is having a hard time hitting their targets (they always seem to undershoot), why on earth would they perfectly offset stimulatory fiscal policy actions in that environment? Why cant a CB work with a legislative body to achieve some end they are having trouble achieving on their own? Why must they insist on undermining the actions of the executive or legislative branches of government if they have the same end goal?

    I get why the BoJ would offset a tax increase, but I cant see why the Fed would completely offset a spending program to rebuild bridges across the county or build a better power grid or invest in upgrading the skills of its workforce, should they try to do that.

  32. Gravatar of M.C. M.C.
    24. November 2014 at 07:58

    @Major.Freedom

    > You’re just trying to introduce a new definition of recession because you know the old one no longer serves your political agenda. You are purposefully trying to mislead people into agreeing with you again.

    No he isn’t, see the NBER FAQ:
    http://www.nber.org/cycles/recessions_faq.html

  33. Gravatar of TravisV TravisV
    24. November 2014 at 08:07

    Someone needs to analyze historical stock market reactions to big surprise changes in immigration policy……

  34. Gravatar of Adam Platt Adam Platt
    24. November 2014 at 08:22

    Two questions, and I apologize if these are things that have been addressed ad-nauseum. I’m new here.

    One question for anybody: Is a nominal GDP target used by any central bank in the world currently or has it been in the past? It seems like the most obvious way for a central bank to act counter-cyclically, but maybe that’s just with the benefit of hindsight and (now) the work of Market Monetarists. If so, has it had a good record of creating much smoother business cycles?

    One question for Scott: I just watched a youtube video (posted by Bentley) of a speech you gave at George Mason, and in it you decline to answer what mechanism you would use to ensure that monetary policy in fact reaches nominal gdp growth during a depression (though you do a good job of explaining why QE is not a great way to do so). What is the main tool you suggest using (aside from simply saying “we’re targeting x percent NGDP growth”). This is particularly important as the key dispute Keynesians seem to have with Market Monetarism is whether monetary policy in and of itself in fact CAN reach such a target.

  35. Gravatar of Charlie Jamieson Charlie Jamieson
    24. November 2014 at 08:48

    We had two problems in 2008-2009 — the collapse in asset values, debt and equity; and a recession that highlighted the decline in real income and real living standards.
    Monetary policy inflated asset prices again (for how long? and was this even necessary?) but hasn’t don’t anything to change living standards.

  36. Gravatar of Don Geddis Don Geddis
    24. November 2014 at 09:02

    @Student: Because you’re ignoring any analysis of why the CB is “having a hard time hitting their targets”, “always undershoot”, “having trouble achieving on their own”. You seem to think of it as though they are somehow out of ammunition, and have done all they can, and have no more power to provide additional stimulus.

    That framework is false. Central banks ALWAYS have the option of providing more stimulus. If they haven’t done it, it’s because they actually don’t want more stimulus. (That may be a bad decision, but the point is that it IS a decision.)

    Also, re: building bridges and power grid and workforce skills … you’re confusing the nominal economy and the real economy. The legislature can make all sorts of supply-side improvements; the central bank doesn’t have anything to do with that. It only controls (nominal) aggregate demand. So the real effects of building a bridge wouldn’t be “offset”; only the nominal impact on annual spending would be offset.

  37. Gravatar of Don Geddis Don Geddis
    24. November 2014 at 09:09

    @Adam Plant: No, no major central bank has yet explicitly targeted NGDP.

    “what mechanism … aside from simply saying we’re targeting NGDP” You probably need to read Nick Rowe’s post for the people of the concrete steppes. Asserting a credible target IS actually 99% of the mechanism.

    As for the other 1%, heck I could do it, if you made me “king of the Fed”. Just announce exponential QE: $10B bonds purchased the first week, $20B the second, then $40B, then $80B, then… Do you honestly think I would be able to buy up all of planet Earth, using magically created fiat paper, before inflation makes it as high as 2%? Fiat central banks only fail to inflate, if that isn’t really their goal.

  38. Gravatar of Don Geddis Don Geddis
    24. November 2014 at 09:14

    @Charlie Jamieson: “Monetary policy … hasn’t done anything to change living standards.

    Compare the unemployment rates in the US, vs. the Eurozone, over the last couple of years. Millions of people in the US with new jobs would sharply disagree with you that their living standards haven’t improved.

  39. Gravatar of Charlie Jamieson Charlie Jamieson
    24. November 2014 at 09:22

    @Geddis: The employment rate as measure by labor participation rate is the lowest since 1978. This is the rate economists should use — there are too many people not counted in the ‘official’ employment rate who still want to work or would work if there was a job available, or (and this is the big mistake we made by inflating assets) if people with capital felt they could get a return on investment by employing people rather than buying financial assets.

  40. Gravatar of Adam Platt Adam Platt
    24. November 2014 at 10:16

    @Charlie: The labor participation rate is influenced by a lot of factors other than unemployment. The rising percentage of the population above retirement age will be the biggest factor pushing that down for the foreseeable future. That’s why “Austrians” love to use it, they know it will tell them what they want to hear.

    @Geddis: I agree with what you’re saying, the Keynesian argument that monetary policy CAN’T produce inflation at a certain point is bizarre and blatantly wrong. However, Scott specifically said that QE is not an ideal way to raise inflation and didn’t explain on camera what his alternative was. That’s what I’m curious about.

  41. Gravatar of TravisV TravisV
    24. November 2014 at 10:41

    Deirdre McCloskey wrote a 55-page review of Piketty’s book:

    http://scottgrannis.blogspot.com/2014/11/a-devastating-critique-of-piketty.html

  42. Gravatar of Morgan Warstler Morgan Warstler
    24. November 2014 at 11:06

    Scott,

    1. If you got had to pick between either a NGDP (no level) target of 5% from the current Fed

    OR

    A 2% inflation Level Target (full fed commitment to make up)

    Which do you choose?

    2. Ok… now what about:

    NGDPLT at 4%

    OR

    Inflation target at 2.5% (again same Fed, but no makeup)

    3. Ok now what about:

    3% NGDLT GUARANTEED FOR 30 YEARS

    or

    2% inflation target (current Fed, no change)

    Can you answer these for me? I’m trying to measure the relative values you place on target, vs. level, versus long term commitment to level.

  43. Gravatar of Steven Kopits Steven Kopits
    24. November 2014 at 11:13

    This is a nice post, Scott.

    And you’re pretty famous yourself, now.

  44. Gravatar of Charlie Jamieson Charlie Jamieson
    24. November 2014 at 11:21

    @Platt
    Re: the employment numbers. Your point has some merit. I was unable to find employment participation rates for 16 to 66. The government rates include those 18 to 115, which is not helpful. One of my issues with the economists today is they just take government numbers and don’t do a little legwork and produce some independent numbers.
    On the other hand, some of the data suggest that participation rates are down across the demographic spectrum. I’ve also seen data that suggests the boomers are actually delaying retirement.
    Professor Sumner says that we are six months away from achieving the ‘natural rate of employment’ which is quite shocking considering that the U6 rate is still 4 points higher than it was before the recession.

  45. Gravatar of Steven Kopits Steven Kopits
    24. November 2014 at 12:27

    Charlie –

    All this and more is in the spreadsheet linked here:

    http://www.prienga.com/blog/2014/10/3/employment-tables

  46. Gravatar of Steven Kopits Steven Kopits
    24. November 2014 at 12:30

    Also, if we have appropriate labor market policies, our employment to population ratio for the 15-74 age group would be 7 per hundred higher than it is now.

    The linked graph makes this pretty clear:

    http://www.prienga.com/blog/2014/10/31/employment-to-population-ratio-detail

    The US is the single worst performer, compared to the pre-recession period, of all the advanced countries. By a large margin.

  47. Gravatar of effem effem
    24. November 2014 at 13:11

    @student

    I think this fear over deflation is frankly absurd. The patient will not die. Yes, you may have a tough recession and the system would have to delever to a degree. But what comes out would be quite antifragile as opposed to our current system in which any slight hiccup in growth creates a disaster and forces us to bail out the rich.

  48. Gravatar of Daniel Daniel
    24. November 2014 at 13:20

    effem

    I take it you’re a fan of “trial by ordeal”. Nothing like a bit of trauma to build character, eh ?

  49. Gravatar of Student Student
    24. November 2014 at 13:35

    @Don Geddis

    Good points but I don’t think the Fed is out of ammo. I just don’t understand why a CB has to go around offsetting policy it’s seemingly in support of. If a you’re below target (whatever the metric your using), why offset fiscal stimulus? That doesn’t seem to make any sense.

    @effem

    Isn’t deflation pretty much a handout to creditors (who tend to be rich)?

  50. Gravatar of Adam Platt Adam Platt
    24. November 2014 at 13:43

    Effem,

    Your ideas were exactly what was tried during the first few years of the great depression (“get rid of the rot”). The problem is, when you have deflation and recession, the patient never “comes out”. It’s a self-reinforcing downward spiral. Essentially you would just end up destroying any business or household that relies on credit to even a small degree.

  51. Gravatar of Daniel Daniel
    24. November 2014 at 14:18

    Student,

    The Fed’s real target is different from its officially stated target. So is the ECB’s.

    The monetary sadists have taken over (see effem’s comments if you want to see their thinking) and they certainly won’t let a few broken eggs (the unemployed are a bunch of lazy bums anyway) prevent them from making an omelette (a brave new anti-fragile world).

    The fact that the omelette doesn’t seem to be ready anytime soon doesn’t seem the phase them one bit.

  52. Gravatar of dw dw
    24. November 2014 at 14:37

    those who seem to think just let it fail sound a lot like doctors from middle ages, the ones who bled their patients to ‘help’ them get well. course we have tried that before. and just about convinced the nation that capitalism was a bust for the majority of the population.

    seems like a really good way to change the US economy. and kill a few folks while doing so

  53. Gravatar of Greg Ransom Greg Ransom
    24. November 2014 at 15:06

    “Greg, So the Great Depression is a myth? It never happened?”

    ?????

    This would be like a Platonist responding to Darwin by saying:

    “So the species “horse” is a myth? Horses don’t exist?”

  54. Gravatar of Greg Ransom Greg Ransom
    24. November 2014 at 15:12

    Scott: “Biology is the study is functional essences and the various Platonic kinds we name as the different species.”

    Scott, “So, zebras don’t exist? Zebras were never created?”

  55. Gravatar of Don Geddis Don Geddis
    24. November 2014 at 17:15

    @Adam Platt: “Scott specifically said that QE is not an ideal way to raise inflation and didn’t explain on camera what his alternative was.” I should hesitate to speak for Sumner, and just let him answer for himself. But, having watched him here on his blog for years, I can take a pretty good guess what he meant. Namely, he was distinguishing between ordinary people (and perhaps you) who look for the “concrete steps” of monetary policy, the specific levers to change nominal aggregates … vs. those who understand that setting expectations does most of the work.

    To be specific, Sumner would probably say that the “alternative” is: set a clear NGDPLT target, back it up with the threat of unlimited purchases, and the result will be you hardly need to actually do any OMOs at all, you’ll achieve your target just by expectations/threat. The “concrete step” is just the same QE … but in a totally different framework. Sumner would be trying to contrast that with “concrete” people (who don’t understand expectations), who would instead say, “we did $100B of QE and raised inflation 1/2%; therefore Sumner must be recommending that we next do $400B of QE to get to 2% inflation.” Sumner is rejecting the idea that “amount of QE” is a direct lever to hitting an NGDP target (in the absence of setting expectations).

  56. Gravatar of Don Geddis Don Geddis
    24. November 2014 at 18:34

    @Student: “I don’t think the Fed is out of ammo. … If you’re below target … why offset fiscal stimulus?

    Why are you below target in the first place? When you can answer that question, you’ll have your answer to your own question.

    (Or see Daniel’s reply above.)

  57. Gravatar of ssumner ssumner
    24. November 2014 at 18:35

    Philo, No, what the Fed policy “ought to be” in the long run is not the proper basis for evaluating current policy. I may favor 5% NGDP targeting, but if they are doing 3% NGDP targeting then an action that may be wise under the assumption they were doing the right policy (say 5%) would be wrong if we assume they are doing the wrong policy (say 3%).

    Of course these numbers are simply illustrative, I don’t know what the optimal growth rate is.

    Maurizio, There are probably a few other benefits, such as making the zero bound less of a problem for monetary policymakers–but debt is the big issue in Japan, whereas unemployment is the big problem in Europe.

    Thanks Brian.

    Robert, I’d be honored if you stole from me.

    Student, You said:

    “I get why the BoJ would offset a tax increase, but I cant see why the Fed would completely offset a spending program to rebuild bridges across the county or build a better power grid or invest in upgrading the skills of its workforce, should they try to do that.”

    Here’s what we know:

    1. The Japanese government built an enormous amount of useless infrastructure in the 1990s and 2000s.

    2. The BOJ did offset the effects, so much so that NGDP fell for 20 years.

    You may not “get” why they did that, but you can hardly deny that they did so.

    Travis, I suspect that more immigration would boost stock prices, and that the 2006 immigration crackdown depressed housing prices.

    Adam, You said;

    “This is particularly important as the key dispute Keynesians seem to have with Market Monetarism is whether monetary policy in and of itself in fact CAN reach such a target.”

    I think almost all economists understand the Fed can hit any nominal target; people like Krugman doubt that they will do so, which is a separate issue. My view is that the Fed should use NGDPLT. In that case, they can use the same sort of tools they used (successfully) prior to the 2008 recession. No special tools like QE are needed. Without NGDPLT the Fed does need special tools like QE and forward guidance–that’s what I meant.

    My preference would be targeting NGDP futures prices, but they don’t really need to do that.

    BTW, I can’t imagine why Bentley would post a speech I gave at George Mason; I have much more recent speeches available. I just gave one at Heritage, which has my more recent views. Also the speech at the Adam Smith Institute.

    Charlie, The decline in living standards reflects cyclical and long run factors. Monetary policy can only address the cyclical factors. You need supply-side reforms to boost trend growth rates. We have not tried monetary stimulus yet, so you have no basis for forming a judgment about how well it has or has not worked.

    Morgan,

    1. 2% PLT

    2. 4% NGDPLT

    3. 3% NGDPLT

    Charlie, You said:

    “Professor Sumner says that we are six months away from achieving the ‘natural rate of employment’ which is quite shocking considering that the U6 rate is still 4 points higher than it was before the recession.”

    We were not at the natural rate of unemployment before the recession. However I admit the 6 months is an estimate, it may be a slightly different number. We do have employment data for age 25 to 54.

    Greg, Both zebras and aggregates do exist.

  58. Gravatar of Adam Platt Adam Platt
    24. November 2014 at 19:19

    Scott,

    I’m not sure Krugman would agree with your assertion that the central bank could always reach a Nominal GDP target. His work is full of charts showing how much Japan, Bernanke, etc… expanded the monetary base without seeing any effect on inflation. I think he honestly believes that once the zero lower bound is reached there’s nothing more monetary policy CAN do.

    The reason I’m being a bit dogged on this question is that you have me fully convinced that the Nominal GDP target is the most accurate counter-cyclical policy, and is really the key to minimizing recessions. In hindsight it’s so simple that it’s amazing that it hasn’t been tried before.
    But the theory would be quite novel and faced with skepticism, particularly in the desperate situation in which it is likely to ultimately finally be tried. So say you’re Chairman of the Fed and you set a nominal gdp target during a depression. The Keynesians scoff that you can’t do it, the Austrians fill their bathtubs with gold coins, and the markets don’t budge. How do you show them you’re serious? I do assume that during a zero lower bound/deep recession situation some sort of concrete step would have to be taken.

  59. Gravatar of Adam Platt Adam Platt
    24. November 2014 at 20:41

    I stand corrected. After re-reading Krugman, I can’t quite tell whether he’s doubting monetary policy’s ability to cause inflation in a liquidity trap, or if he’s merely questioning its ability to affect real gdp and unemployment (frankly sometimes it seems like he may be confused on the matter, himself). Anyway it doesn’t seem that he questions your assertion that Nominal GDP-targeting could cause inflation, so ignore my previous question.

  60. Gravatar of Student Student
    25. November 2014 at 05:03

    So the fed has a secret target below their stated target. Fine, then I agree with krugman, the fed is unwilling (and dishonest) to do what it takes. Ain’t that a bitch. An unelected body basically has the power to undermine everything any other branch of government does without openly stating things or having to face any direct accountability. That makes me slightly uncomfortable.

  61. Gravatar of Student Student
    25. November 2014 at 05:05

    So the fed has a secret target below their stated target. Fine, then I agree with krugman, the fed is unwilling (and dishonest) to do what it takes. Ain’t that a bitch. And its not a separate issue. It is the central issue.

    An unelected body basically has the power to undermine everything any other branch of government does without openly stating things or having to face any direct accountability. That makes me slightly uncomfortable.

  62. Gravatar of ssumner ssumner
    25. November 2014 at 06:54

    Adam, You said:

    They could peg the price of NGDP futures contracts. Currency depreciation is another option.

    Student, It’s more complicated than that, but this is why NGDPLT is better, no more secret targets are possible.

  63. Gravatar of Daniel Daniel
    25. November 2014 at 07:17

    Student,

    You really should read what Robin Hanson has to say on human hypocrisy. In short, it’s hard-wired. Saying one thing and doing another is what’s natural for humans.

    So yes, this is exactly why predictions markets (an NGDP futures market being one such thing) meet with such resistance.

    Unaccountable, unelected entities like the Fed would lose their powers. Hence, they fight it tooth and nail.

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