A very perplexing post from James Hamilton

Right before I got into blogging I started reading James Hamilton.  He was a sort of inspiration to me; he kept his head as the world around him seemed to be losing its mind.  My favorites were his posts mocking the idea of a “liquidity trap” the idea that a fiat money central bank would somehow be unable to “debase it’s currency” when rates hit zero.  Now he seems to have gone over to the other side, as his new post is very skeptical of whether the Fed could hit a higher inflation or NGDP target.  And yet the reasons provided seem based on macro theory that was discredited long ago.  More specifically, he seems to have become one of what Nick Rowe calls “the people of the concrete steppes.”

These academic critics would like to see the Fed announce more aggressive targets in the form of either higher rates of inflation or faster growth of nominal GDP. I will get to the issue of these targets in a moment, but first would like to discuss the mechanical details of what, exactly, the Fed is supposed to do in the way of concrete actions in order to ensure that any such announced target is achieved.

Recall that current Fed actions that are mechanical in nature have almost no impact on prices, output, or any other macro aggregate.  The effect of monetary policy, if it is effective at all, comes mostly from signaling future policy intentions.  In the comment section Nick raises this very point:

If a (say) 5% NGDP level path target (with a catch-up step) were credibly communicated, all those “mechanical” and “concrete” “logistics” would have to be implemented very quickly, only in the exact reverse direction. The Fed’s balance sheet is far larger than it would need to be if people expected 5% NGDP level path. The more ambitious the target, the easier the logistics.

And here’s how Hamilton responds:

Nick Rowe: Not sure I’m following your argument. I gather your claim is that the announcement itself would solve the problem. If so, I’m skeptical about that assumption. I am just looking at the mechanics of what the Fed would do right now, with numbers and the situation such as we have, in order to boost nominal GDP growth. And my answer is, it would have to do more buying of securities, leaving bigger concerns than those we have right now as to how later the Fed is going to go about undoing those positions.

Hamilton has it exactly backwards.  Countries with lower expected NGDP growth than the US (like Japan) have higher base to GDP ratios.  Countries like Australia which have faster expected NGDP growth (and thus avoided the zero rate bound) have lower base to GDP ratios (indeed only about 1/4th US levels.)  Nick’s right that a policy of faster NGDP growth would require the Fed to reduce the monetary base.  I’m surprised that Hamilton finds this a novel argument.  He’s one of the best scholars of the Great Depression, and is well aware of what happens to base demand in a depressed economy with near zero interest rates.

In the comment section a number of commenters confronted him with his earlier quotations mocking the idea that the Fed would be unable to boost inflation.  (Read comments by Anon1, and Andy Harless.)  And his response was as follows:

Anon1: Not sure I understand your point, either. I claimed then and still claim today that the Fed has the power to prevent deflation.

But the quotation provided by Anon1 doesn’t just say the Fed has the power to prevent deflation, he also claims it has the power to create inflation.  If Hamilton is right that there is no contradiction, then I humbly suggest that almost everyone must be completely misinterpreting his current message.  (It would be interesting to know how Tyler Cowen interprets the post, which he calls “superb.”)

Let me first acknowledge that it is very possible I have misinterpreted either Hamilton’s earlier posts or his current post.  And yet I can’t help thinking about the large number of  elite monetary theorists who seem to have changed their views since before the recession, while strongly denying any change.  The most famous example is of course Ben Bernanke.  The most amusing example is Frederic Mishkin, who keeps changing his textbook in ways that make current Fed policy look less bad.  Why the changes?  What scares me is that I fear some economists think that recent events in the US cast doubt on the effectiveness of monetary stimulus, whereas in fact they confirm that effectiveness.

Hamilton also makes this odd claim:

And the way I see current U.S. monetary policy is exactly as Bernanke defended it at a recent press conference. I believe the Fed has effectively and credibly communicated that it is not going to allow the U.S. to repeat Japan’s experience of deflation or extremely low inflation. Deflation is the exact opposite of the potentially chaotic flight from dollars that I described above, and deflation would unquestionably be counterproductive for the U.S. By drawing a line at keeping inflation above 2%, I think the Fed can use its limited available mechanical tools in a credible way to achieve an appropriate goal.

This seems to imply that Bernanke is promising to keep inflation above 2%, but the reverse is more nearly correct.  Headline inflation has averaged well below 2% since mid-2008, the slowest rate since the mid-1950s.  This tight money policy has of course made the debt crisis much worse.  By mid-2010 the core inflation rate had fallen to 0.6%.  Their current forecast calls for 1.9% inflation over the next few years, suggesting 2% is more like a ceiling than a floor.  If we’d had a 2% floor the recession would have been much milder.  But it’s actually much worse than that.  Both core and headline inflation are dominated by housing costs.  The BLS numbers show housing up by about 8% since early 2006, whereas the Case-Shiller index shows prices down 32%.  Obviously the actual fall in all housing costs (including rental units) is far less than the Case-Shiller number, but nonetheless the actual CPI number is hugely distorted by mis-measured housing prices

Based on his late 2008 writings that helped inspire me to get into blogging, I’d expect Hamilton to be outraged by Bernanke’s recent statements.  The US clearly has a nominal spending shortfall.  Bernanke says the Fed can fix it, but that it doesn’t need fixing because they are close to their 2% inflation target.  What about the dual mandate?   I’m confused and somewhat dismayed by Hamilton’s support for Bernanke, and can’t find anything in this new post that would justify it.


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42 Responses to “A very perplexing post from James Hamilton”

  1. Gravatar of Benjamin Cole Benjamin Cole
    3. May 2012 at 07:15

    Excellent blogging.

    I am only a camp follower, but as a layman I find the flip-flopping of a Frederic Mishkin, a John Taylor, a Ben Bernanke to be exasperating.

    Really? You (Mishkin, Bernanke, Taylor) want to say now, with grave face, that the Fed cannot generate inflation and growth (at zero bound) when before you said it could?

    So, should we have believed you before, or now? In both cases the said economists appealed to fundamentals to make their case. Have the bedrock fundamentals of the economic profession suddenly flipped? Really?

    Does the word “Econo-Shaman” come to mind?

    And really, as a practical matter (setting aside the sorry current state of the economics profession), am I really supposed to believe a central bank cannot cause inflation?

    Even without signaling intent (as I believe the Fed should) if the Fed conducted serious and sustained QE, to the tune of $100 billion a month for 24 months or more, there would be no inflation?

    If that’s true, then let’s do it. We can wipe out $2.4 trillion of public debt in the next 24 months, and suffer no consequences at all. The Fed can keep the debt on its books for the next couple hundred years.

  2. Gravatar of J.V. Dubois J.V. Dubois
    3. May 2012 at 07:20

    I am wondering, if these “concrete steps” are really that much concrete. I mean, imagine that you are Bernanke now and you know that unemployment could possibly be lower but you do not know how much. How would you declare your short term target? Would you say:

    “Now the Fed will use its balance sheet until one of the following condition applies”

    1. Unemployment falls to 5,7%
    2. Inflation rises to 4,5%

    I mean, how credible is this? You can hardly make a rule from this version of double mandate, because it is only inflation that you really control. You do not control unemployment directly. So by actually adopting dual mandate FED loses its credibility because its policy becomes more guided by discretionary decisions. This on the other side means that under such unclear rule Bernanke can even say something like that 9% unemployment is just fine.

    So I see the problem as the one of inverse problem of accountability. FED defends its inflation targeting because that is the only thing that resembles anything that they may be accountable for. As soon as they step into the world of moving inflation target up and down, if they will have to actually decide something – that is when they could be accountable. “Why did you choose 5,7% unemployment and not 6,2% as this new model clearly told explained”?

    My story has only one weak point as I see it. Even if FED resist NDGP level targeting for some esotheric reasons, why do they resist price level targeting? That is still solely under their control and even now they may claim it to be in compliance with their 2% inflation target.

  3. Gravatar of Mark A. Sadowski Mark A. Sadowski
    3. May 2012 at 07:32

    Scott,
    Yes, I read through the post by JDH and found it quite entertaining. It’s almost as if there are now two Hamiltons and the current Hamilton is perplexed by the words of the previous version, and is somewhat annoyed that commenters have the nerve to use his own words against him (sort of like Bernanke was recently).

    DeLong responded, and I especially liked this part:

    “Thus my basic criticism of Hamilton is that he is wrong when he writes:

    ‘the Treasury could achieve pretty much the same effect [as quantitative easing] if it were to do less of its borrowing with 10-year bonds and more of its borrowing with 3-month bills…’

    That seems to me to be wrong, because cash is special even at the zero lower bound precisely because we are not always going to be at the zero lower bound. As Ben Bernanke wrote back in 1999:

    ‘[I]f the [present and future] price level were truly independent of [today’s] money issuance, then the monetary authorities could use the money they create to acquire indefinite quantities of goods and assets. This is manifestly impossible in equilibrium. Therefore money issuance must ultimately raise the price level, even if nominal interest rates are bounded at zero. This is an elementary argument, but, as we will see, it is quite corrosive of claims of monetary impotence…’

    I think Bernanke (1999) had it dead right.”

    http://delong.typepad.com/sdj/2012/05/a-nice-piece-by-jim-hamilton-on-the-fed-but-with-one-flaw-risk-spread-vs-expected-inflation-effects-of-qe-at-the-zlb-depar.html

    Bernanke circa 1999 sounds a lot like Sumner circa all of the time.

  4. Gravatar of David Beckworth David Beckworth
    3. May 2012 at 07:56

    We now have proof that there are alien body snatchers who replace the real person with a slightly flawed duplicate.

  5. Gravatar of ssumner ssumner
    3. May 2012 at 08:05

    Ben, I am perplexed too.

    JV, You are confusing dual mandate with dual target. NGDP is a single target that addresses the dual mandate. I agree that targeting inflation and unemployment is awkward and confusing–not a good idea.

    Mark, DeLong is correct.

    David, The amazing thing is that I was using the body snatcher metaphor 2 or 3 years ago, and the problem has since become far worse.

  6. Gravatar of 123 123
    3. May 2012 at 08:25

    Hamilton is not a man from the concrete steppes. He is a man from the treasury-bull-market land. He does not deny that it is possible to get the NGDPLT. He worries about the interest rate volatility.

    My Cowen emulation mode is telling me that Cowen is worried that the interest rate volatility could cause an AS shock, that would negate the benefits of NGDPLT.

  7. Gravatar of Tom Dougherty Tom Dougherty
    3. May 2012 at 08:53

    I read Hamilton as saying that if we are to achieve high NGDP then the mechanical steps to achieve such a result is that the Fed will have to have a large scale purchase of treasury bills increasing its balance sheet to even higher levels, which is potential destructive to the economy if inflation gets out of control.

    I see the response as being, large scale purchase of treasuries is not necessary. All that is needed is to announce a NGDP target of 5% and expectations will take care of the rest. Further, the mechanical steps the Fed will need to take will actually be to reduce its balance sheet or inflation could get out of control.

    I see expectations as the difference between Hamilton and Rowe, Sumner, Beckworth, etc., not whether the Fed is able to create inflation. So, my question is do we have any evidence from the US or other countries that the mere announcement of a goal will be enough to achieve it without any “mechanical steps” by the central bank? Expectations is key to your position. How can the mere announcement alone change people’s expectations of higher NGDP if they do not see any action by the Fed to back up their claim?

  8. Gravatar of libfree libfree
    3. May 2012 at 08:56

    Maybe John Galt is going around convincing the worlds economists to change their views on monetary policy? Scott, if this happens to you, promise us you’ll tells us why!

  9. Gravatar of Major_Freedom Major_Freedom
    3. May 2012 at 09:00

    ssumner:

    Recall that current Fed actions that are mechanical in nature have almost no impact on prices, output, or any other macro aggregate.

    This violates the basic law of supply and demand.

  10. Gravatar of Saturos Saturos
    3. May 2012 at 09:28

    “And yet I can’t help thinking about the large number of elite monetary theorists who seem to have changed their views since before the recession, while strongly denying any change. The most famous example is of course Ben Bernanke. The most amusing example is Frederic Mishkin, who keeps changing his textbook in ways that make current Fed policy look less bad.”

    And yet Scott still refuses to fully endorse “political” theories of policy inadequacy.

  11. Gravatar of Saturos Saturos
    3. May 2012 at 09:30

    Major Freedom: No it doesn’t, money demand rises with supply when injections are temporary… oh screw it. Forget I said anything.

  12. Gravatar of Saturos Saturos
    3. May 2012 at 09:35

    “The US clearly has a nominal spending shortfall. Bernanke says the Fed can fix it, but that it doesn’t need fixing because they are close to their 2% inflation target.”

    This is precisely why all references to “inflation” should be replaced by nominal spending, or as we say here on the MoneyIllusion, NGDP. You’d think smart economists could always keep it all straight in their heads, but perhaps they can’t. Which shouldn’t surprise us, after all over half of them still think Keynes was a brilliant thinker.

  13. Gravatar of dwb dwb
    3. May 2012 at 09:42

    very puzzling. Even DeLong had a pretty straightforward comeback.

    Noah Smith has a good post about model uncertainty, but i dont agree that model uncertainty leads (or should lead) to paralysis. It means you should put a lot of weight on market based information, which is telling the Fed: epic fail there on the 2% target!

  14. Gravatar of RebelEconomist RebelEconomist
    3. May 2012 at 09:58

    I think I understand – James Hamilton is saying that QE in which the transmission mechanism is limited to long term interest rates might lack the power to deliver an objective like an NGDP or employment target. The central bank can also raise the rate of inflation if it wants, but since in practice expectations cannot be shifted without some action, some drastic and damaging operation is necessary to start the process. It might be worth risking such damage to prevent deflation, but not worth it to raise the rate of NGDP growth through additional inflation, and the market knows it.

  15. Gravatar of Becky Hargrove Becky Hargrove
    3. May 2012 at 09:59

    Saturos,
    LOL. One less can of worms for lunch.

  16. Gravatar of dwb dwb
    3. May 2012 at 10:07


    This is precisely why all references to “inflation” should be replaced by nominal spending, or as we say here on the MoneyIllusion, NGDP..

    a-men

  17. Gravatar of Morgan Warstler Morgan Warstler
    3. May 2012 at 10:40

    Concrete steps from Ben:

    “STARTING TODAY… there will be no make up of past AD… the economy will grow at 4% NGDPLT FOREVER…. this means that if we have 4% inflation, and zero growth, we will be raising rates.

    “Assuming we have 2% RGDP, this means if we have 2% inflation we will be raising rates.

    “PLEASE UNDERSTAND WHAT THIS MEANS: Since we are very soon going to be pushing through that wall IF you want us to keep interest rates down, THE GOVERNMENT WILL HAVE TO BECOME MORE PRODUCTIVE OVERNIGHT.

    “You have that right my friends, The Federal Reserve is engaging in a monetary policy that will force the government to achieve more with less OR ELSE WE ARE RAISING RATES.

    “You have that right my friends, The Federal Reserve is engaging in a monetary policy that will force the government to cut through regulations that keep energy prices and public employee salaries higher than they would be in a free market OR ELSE WE ARE RAISING RATES.”

    —–

    No further action will be required.

    The economy will go boom.

    This is EXACTLY what NGDPLT does, this is EXACTLY what the real effect of it is, and until you grasp this, you will be left wondering what the transmission mechanism really is.

    Something really does change. NGDPLT codifies an easily filled growth cap WHICH FAVORS immediate policy changes for productivity gains anytime we near the cap.

    There is no way around this… NGDPLT is the Fed forcing the government to do exactly the things Fisher wants to accomplish.

    The consolation prize for liberals is that another 2008 will never happen.

  18. Gravatar of Saturos Saturos
    3. May 2012 at 10:53

    I still remember my first economics teacher in high school. (She was a Keynesian.) On inflation, she went through the costs of inflation. One of the kids in class suggested that inflation was bad because it reduced your purchasing power. “That’s a very good point” said my teacher approvingly. I put up my hand and made the obvious reply, that obviously if the general level of prices was rising then so too would wages. My teacher replied, “oh, but they may not. It doesn’t always happen that wages keep up with prices.” “You mean people living on non-indexed pensions, right?” “No, I’m talking about ordinary workers.” She was a teacher who wasn’t exactly encouraging of classroom debate. Her whole coverage of the topic was ambiguous as to what exactly inflation was, treating Friedman’s dictum as a novelty and refusing to brook that the “cost-push inflation” she liked to dwell on had much to do with the aggregate supply curve. Of course, now I realize that her “prices rising ahead of wages” example was about supply-side “inflation”, which could be seen by deflating the price level to find that real wages were lower because real income was lower.

    In the same year, my history teacher (we were studying Henry VIII) explained inflation by equating it with currency debasement. I think she should have taken over the economics class.

  19. Gravatar of Tommy Dorsett Tommy Dorsett
    3. May 2012 at 10:58

    Scott – Would not the initial impetus for an explicit NGDP goal have to come from either more Fed purchases or an expectation that previous purchases are more permanent given the ~4% NGDP we have been getting thus far during the recovery. I agree that the ‘mechanism’ is the expectations channel/hot potato effect, but usually a central bank has to ‘act’ to fortify those expectations.

  20. Gravatar of Morgan Warstler Morgan Warstler
    3. May 2012 at 11:03

    Saturos, did your “Keynesian” teacher tell you that public school teachers should not get wage increases past productivity gains (firing teachers) and inflation?

    Keynes is very clear, public employee compensation and safety net expenditures are supposed to run below revenue during good times.

    Keynes would have screamed from 1998 onward – you are all going to get GUTTED!

    If you want the sugar you take the medicine, the ying and yang… if you don’t take both, you aren’t Keynesian.

  21. Gravatar of Saturos Saturos
    3. May 2012 at 11:05

    Morgan, why would they be raising rates, in that scenario? With a low natural rate and the economy on the new 4% trend, further rate rises would amount to a contractionary monetary policy. Your Fed is saying that unless government cuts waste, the Fed will contract the economy. And you think the government will respond to that? Remember the debt ceiling negotiations? Or is the private sector supposed to respond to a threat to deviate from the Fed’s own new target by… spending more?

    Are you saying that with the economy on track, the only way to get lower rates is by reducing fiscal deficits? But why would the need to lower interest rates be an especially strong incentive? It doesn’t work at other times – the government is always pushing rates up by competing with the private sector for funds – why would it work now?

    “Something really does change. NGDPLT codifies an easily filled growth cap WHICH FAVORS immediate policy changes for productivity gains anytime we near the cap.”

    How would that work? And it’s not a growth cap, it’s a growth target (assuming we always stay on path, as you said earlier).

  22. Gravatar of Saturos Saturos
    3. May 2012 at 11:08

    Morgan, yes but Keynes was always quite “flexible” on his ideas. (Remember what he said to Hayek before he died. Or for that matter, the massive flip-flop between ToMR and the GT) I think Keynes would have happily hobnobbed with the liberals were he still alive.

  23. Gravatar of Saturos Saturos
    3. May 2012 at 11:09

    He and Stiglitz would have been great chums, despite each one being fully aware of the terrible deficiencies in the others’ macro ideas.

  24. Gravatar of Mark A. Sadowski Mark A. Sadowski
    3. May 2012 at 11:22

    Scott wrote:
    “The amazing thing is that I was using the body snatcher metaphor 2 or 3 years ago, and the problem has since become far worse.”

    Which is why when JDH opened with this I winced:

    “Johns Hopkins University Professor Larry Ball, Princeton Professor Paul Krugman, U.C. Berkeley Professor Brad DeLong, University of Oregon Professor Tim Duy and Texas State University Professor David Beckworth are among those recently arguing that Fed Chairman Ben Bernanke is neglecting his own earlier academic insights into what the central bank should be doing in a situation such as the United States presently finds itself.”

    True, you haven’t brought this up recently, but that’s all the more reason you deserved a mention. (Well, at least David got a nod.) I seem to recall you making a big stink over Bernanke’s blatant inconsistancies well before anyone else even noticed. (And now, naturally, Krugman is getting the lion’s share of the publicity and credit.)

  25. Gravatar of Bill Woolsey Bill Woolsey
    3. May 2012 at 11:54

    I thought it was pretty clear.

    Thinking of the Fed as part of government, quantitative easing is shortening the government’s borrowing. This is fiscally risky. If people lose confidence in the U.S. government and don’t want to lend, the government will have huge debts coming due much faster than they can pay.

    The wise thing to do is for the government to lock in the low rates by borrowing long. Ideally, 4% to 5% of the government’s debts would come due each year. Running a surplus sufficient to pay that off would be feasible.

    If, intead, the government funds it all with one year T-bills, then it all comes due every year. Impossible to pay off.

    Having the Fed buy up the entire national debt is the same thing as funding it all with T-bills.

    I think having the Fed purchase foreign bonds would solve this problem.

    Of course, I agree that the explicit target for a growth path of nominal GDP might avoid this problem.

  26. Gravatar of Saturos Saturos
    3. May 2012 at 12:07

    Bill, couldn’t the Fed help the Treasury by agreeing to roll over the debt? It’s a part of the government too, right?

  27. Gravatar of Jim Glass Jim Glass
    3. May 2012 at 12:35

    As to JH, Ben, others saying the Fed has done its job by avoiding deflation, and being so happy with sub-2% inflation and this level of AD, ISTM the cult of opportunistic disinflation is alive and well.

  28. Gravatar of Lulu Lulu
    3. May 2012 at 13:54

    No doubt, there are mechanisms for a central bank to hit NGDP targets if it wants to. But I think the call for “a mechanism” within the declaration is not that ridiculous for a few key reasons:

    1) A specific mechanism helps the communication strategy. If the declaration that a 5% NGDPLT is going to be hit THOUGH the continuation of large scale asset purchases as well as “currency debasement” in international markets, this may be interpreted by firms as a more concrete way to hit the target. This, in turn, will spur the market to move towards realizing the goal. Even if the Fed is Chuck Norris, it probably needs to break a few bones before others get scared. Traditional monetary policy had a long run at stabilization, and was obviously powerful. The shift from the gold standard seemed like heresy, and therefore was effective. What I’m trying to say is that unless the Fed can “surprise” the markets with something credibly massive, it’s possible that the markets will assume the Fed will be too timid.

    2) Picking a mechanism can help with the credibility problem. I always love reading Krugman’s cute line from his ’99 paper on the Liquidity trap on how the BOJ needed to “credibly commit to being irresponsible.” As money is special because of its liquidity, buying up assets that aren’t as liquid would go a long way towards committing to a targeting policy; this was the fundamental thrust of DeLong’s response to Hamilton (http://bit.ly/Iz6m0e).

    Of course, none of this discussion about mechanisms goes against the point that the most successful policy would actually buy very few assets. In the end it all comes down to the regime.

  29. Gravatar of Bonnie Bonnie
    3. May 2012 at 14:32

    “The most amusing example is Frederic Mishkin, who keeps changing his textbook in ways that make current Fed policy look less bad. Why the changes?”

    I am speculating based on some small slivers of fact. There is a certain politician, widely known to have very strong views that are critical of the Fed who is on the House committee that oversees the Fed (about as nonsensical as Syria presiding over the UN Human Rights Commission) and has made several recommendations for the board over the last decade. One of them, Dr. Lacker, was criticized recently by Yglesias on his blog on the Slate for not knowing what his job is: http://www.slate.com/blogs/moneybox/2012/01/13/federal_reserve_bank_president_jeffrey_lacker_need_to_read_the_federal_reserve_act.html

    I looked into Dr. Lacker’s scholarship, and what I was able to look at wasn’t so impressive. It looked like stuff I could write, and I don’t mean that to imply that I am brilliant or educated in economics as he claims to be. But people do look to these folks, as I believe they are supposed to be the cream of the crop.

    I don’t intend to sound conspiratorial here, but there seems to be a heavy influence of the “inflation is theft” group within the institution itself, likely in no small part due to this certain politician. If that is the case then there is nothing you or anyone else can say that will get them to do their job, Taylor rule indications of negative interest rate requirements and output gap notwithstanding. The only way to get the appropriate response out of the Fed will be to unseat them.

  30. Gravatar of Morgan Warstler Morgan Warstler
    3. May 2012 at 14:48

    “Are you saying that with the economy on track, the only way to get lower rates is by reducing fiscal deficits? But why would the need to lower interest rates be an especially strong incentive? It doesn’t work at other times – the government is always pushing rates up by competing with the private sector for funds – why would it work now?”

    CLARITY. IMMEDIACY.

    Imagine Obama puts out a “2012 Jobs Bill” that contemplates 3% raises for 22M public employees.

    It comes with NGDP Impact score that predicts doing this will means private sector borrowing rates don’t come down for 14 more months.

    It doesn’t happen.

    Barney Frank wants to grow Fannie Freddie, the NGDP Impact score says that will raises borrowing rates to X%.

    It doesn’t happen.

    This is a GROWTH CAP. And like ANY cap immediately everyone becomes perfectly attuned to what is using up that 4%.

    It is a pie, and we SEE that pie sliced up month after month.

    This is a very very different world.

    Anything that will increase growth past 4%, suddenly we want to pay for it with deflationary price pressures, so rates stay low.

    We as a society will want all 4% of that to be RGDP.

    We still get to hate inflation. It eats up our NGDP.

    But now new public spending is no longer some invisible deficit debate – it is rates go up tomorrow.

    Saturos, this has to make sense to you.

    Look, we saw this with Clinton in January 1993, but it was too cloudy for almost anyone besides his political team to see, he had to choose between “investing” in the public sector or keeping rates lower for businesses.

    This isn’t cloudy. And this isn’t Carville / Reich pissed off privately at Greenspan. This is main street borrowers with a DASHBOARD VIEW of who and what Americas growth is being allotted too.

  31. Gravatar of ssumner ssumner
    3. May 2012 at 18:12

    123, You said;

    “My Cowen emulation mode is telling me that Cowen is worried that the interest rate volatility could cause an AS shock, that would negate the benefits of NGDPLT.”

    But hasn’t Tyler said he supports NGDPLT?

    Tom, The Fed should supply whatever amount of base money the public wants to hold at 5% NGDP growth. I think it would be much less than right now–that would be an “action” if that’s what you want.

    Look, we know from the way markets respond to Fed signals (not accompanied by actions) that Fed signals are far more important than current actions. Of course in the long run actions are all that matters, but signals are about future actions.

    No central bank has ever failed to convince the public that it wished to inflate, so that’s not a problem.

    libfree, I promise.

    MF, No it’s consistent with the laws of S&D, it’s not consistent with your (weak) understanding of those laws.

    Saturos, What political motive could Hamilton possibly have? It’s not that I have any ideological reason to oppose those theories–I’d gladly accept them if someone could convince me. Indeed it would make it easier for me to make my case. But Hamilton????? I just can’t see any plausible motive.

    dwb, Exactly.

    Rebeleconomist, I suppose that might be his reasoning, but it’s lousy reasoning.

    Saturos, The funny thing is that the reduction in living standards from “supply-side inflation” actually has nothing to do with inflation. It would occur even if prices were falling.

    Tommy, The Fed would have to promise to control the future money supply in such a way as to make it stick. But that’s really easy to do, as we found out during the Great Moderation.

    Mark, Yes, I think my blog was the first, but only because Marcus Nunes didn’t yet have a blog. He fed me all the key Bernanke papers.

    Bill , You said;

    “Thinking of the Fed as part of government, quantitative easing is shortening the government’s borrowing. This is fiscally risky. If people lose confidence in the U.S. government and don’t want to lend, the government will have huge debts coming due much faster than they can pay.
    The wise thing to do is for the government to lock in the low rates by borrowing long.”

    From a fiscal perspective it is 10 times better to prevent a Depression from occurring in the first place, as compared to taking advantage of the resulting low rates.

    It really comes down to what should the Fed target? Why doesn’t Hamilton favor a more robust nominal target? Does he think we have the right amount of demand? If it’s because he thinks it would require a big monetary base, then he has things exactly backwards. The base is big because NGDP growth is the slowest since Herbert Hoover was president.

    Jim Glass, That’s possible.

    Lulu. The credibility problem is vastly overrated, and never really has been a problem. The markets see quite clearly what central banks are about, and always have. In the 1970s markets saw they wanted to inflate, because they did want to inflate. Now markets see they are run by deflationists, because they are run by deflationists.

    Bernanke says the Fed doesn’t want more NGDP, and he’s telling the truth (although I suspect he personally would prefer a bit more NGDP.) And the markets believe him.

    Bonnie, Maybe, but let’s not forget that Obama appointed 80% of the Board, and it would be higher if he hadn’t foolishly left two seats empty.

  32. Gravatar of 123 123
    4. May 2012 at 08:46

    Scott:”But hasn’t Tyler said he supports NGDPLT?”

    Yes he does, but look at the the title of his post: “Does the term structure of debt limit monetary policy?”. So he is willing to debate if the interest rate volatility is one of the costs of NGDP without calling the desirability of NGDPLT into question.

    “If it’s because he (Hamilton) thinks it would require a big monetary base, then he has things exactly backwards. The base is big because NGDP growth is the slowest since Herbert Hoover was president.”
    I think Hamilton believes that NGDPLT is requiring the temporary expansion of monetary base that will be reversed soon, along with huge volatility of interest rates. He is thinking that Chuck Norris will have to beat up people for six months before he can get lazy.

  33. Gravatar of Steven Kopits Steven Kopits
    4. May 2012 at 09:28

    Scott –

    I think Fed signaling only works if the market believes the Fed is actually capable of achieving that goal.

    Now, I understand currency debasement, which is essentially creating assets without corresponding liabilities. The Fed could simply print $200 bn, send it to the Treasury, which sends every household a $2,000 check. Is that what you have in mind? I think it could make sense, but it involves explicit expropriation, which I think both the Fed and the government more broadly are reluctant to do.

    Or does your notion involve buying and selling of securities along the lines of QE III or something similar? If so, what securities do you propose to buy and sell? Could you better explain, in explicit, tell-your-grandmother words, what should be done and how this gets us to 5% NGDP growth?

  34. Gravatar of Saturos Saturos
    5. May 2012 at 00:14

    Well at any rate this does contradict your theory, Scott.
    We have two great economists who knew exactly what to do about the problem before it occurred, or even as it broke, but now seem not to know. Well Bernanke might be hiding the truth due to pressure from everyone else, but what about Hamilton? Clearly lack of understanding cannot be the whole explanation.
    Perhaps we do need to take this body-snatchers theory more seriously…

  35. Gravatar of Jeff Jeff
    5. May 2012 at 06:09

    Hamilton has written at least one paper quantifying the “maturity-shortening” effect of QE, to generally good reviews. Apparently that has led him to the belief that that effect is the only channel through which monetary policy works.

    It may be that banks don’t much care whether they hold short-term Treasuries or interest-paying reserves as assets. But even if you are just looking at the mechanical aspects, that’s not all that Fed purchases do. If the Fed buys something, it increases both bank assets (reserves) and bank liabilities. You know, that stuff we used to call money.

  36. Gravatar of Major_Freedom Major_Freedom
    5. May 2012 at 10:56

    Saturos:

    No it doesn’t, money demand rises with supply when injections are temporary.

    Wrong. Even temporary monetary injections will make prices higher than they otherwise would have been if it didn’t take place.

    ssumner:

    MF, No it’s consistent with the laws of S&D, it’s not consistent with your (weak) understanding of those laws.

    No, it’s not consistent with the law of supply and demand, because when monetary demand is increased, P=D/S will increase. It’s a mathematical certainty.

  37. Gravatar of Yes, the Fed could produce a higher inflation rate | Fox Website Directory Blogs and eBooks Yes, the Fed could produce a higher inflation rate | Fox Website Directory Blogs and eBooks
    6. May 2012 at 07:29

    […] Scott Sumner is dismayed at my focus on the concrete steps the Fed would need to take to implement more stimulus. Scott is a strong advocate of the view that if the Fed were simply to announce a particular target, everything would fall in place to make sure it happens. For clarification, I fully agree with Scott and Brad that it would be possible for the Fed to achieve a higher inflation rate than 2%. My concern is with the robustness of the particular strategies for implementing such an objective. In particular, the fiscal management problem I am referring to is one of a rapid flight from dollars and loss of confidence in the Fed and Treasury. As I explained in my original post, this is the exact opposite of deflation. A strong Fed commitment to avoid deflation should not provoke market fears about the ability of the Treasury and Fed to manage their short-term liabilities. The question on which I and some of the Fed's critics may differ is whether there is a similar robustness to the Fed's announcing that what they're trying to produce is, say, 3.5% inflation. My fear is that the practical instruments available to the Fed are too blunt, and the stability of the expectations equilibrium too tenuous, for us to be confident that the Fed could manage a multi-trillion dollar balance sheet if financial participants develop sudden doubts about how it will play out. […]

  38. Gravatar of Econbrowser: Yes, the Fed could produce a higher inflation rate Econbrowser: Yes, the Fed could produce a higher inflation rate
    6. May 2012 at 07:29

    […] Scott Sumner is dismayed at my focus on the concrete steps the Fed would need to take to implement more stimulus. Scott is a strong advocate of the view that if the Fed were simply to announce a particular target, everything would fall in place to make sure it happens. For clarification, I fully agree with Scott and Brad that it would be possible for the Fed to achieve a higher inflation rate than 2%. My concern is with the robustness of the particular strategies for implementing such an objective. In particular, the fiscal management problem I am referring to is one of a rapid flight from dollars and loss of confidence in the Fed and Treasury. As I explained in my original post, this is the exact opposite of deflation. A strong Fed commitment to avoid deflation should not provoke market fears about the ability of the Treasury and Fed to manage their short-term liabilities. The question on which I and some of the Fed's critics may differ is whether there is a similar robustness to the Fed's announcing that what they're trying to produce is, say, 3.5% inflation. My fear is that the practical instruments available to the Fed are too blunt, and the stability of the expectations equilibrium too tenuous, for us to be confident that the Fed could manage a multi-trillion dollar balance sheet if financial participants develop sudden doubts about how it will play out. […]

  39. Gravatar of ssumner ssumner
    6. May 2012 at 09:06

    Saturos, You said;

    “Well at any rate this does contradict your theory, Scott.”

    I’d rather say it supports my important theory and contradicts my unimportant hunch.

    It supports my theory that the Fed is doing what a consensus of economists want them to do.

    It contradicts my hunch that Bernanke wants to do more. But I have evidence that Bernanke wants to do more (from insider media reports) and also note that Hamilton’s post is internally contradictory. He says he supports Fed policy, but also that he wants 2% inflation to be a floor, which would be more expansionary than current policy, which views it as more like a ceiling.

    Jeff, I think Hamilton knows that money works in many ways, but he’s probably referring to the injection of interest bearing ERs, which have little direct effect, and mostly work through expectations in my view (or maturity shortening in his view.)

    MR, Fed policy affects both money supply and money demand, often leaving P unchanged.

  40. Gravatar of ssumner ssumner
    6. May 2012 at 09:11

    123. NGDP targeting would make interest rates much less volatile.

    If Hamilton thinks NGDPLT requires a bigger base, even temporarily, then he is wrong. FDR proved that.

    Steven, It would be incredibly stupid for the Fed to just give people money, that would require much higher taxes in the future to redeem that money.

    The market has no doubt that the Fed can inflate–just look at market reactions to even slight hints of easing.

  41. Gravatar of Yes, the Fed could produce a higher inflation rate | Bear Market Investments Yes, the Fed could produce a higher inflation rate | Bear Market Investments
    7. May 2012 at 08:09

    […] Scott Sumner is dismayed at my focus on the concrete steps the Fed would need to take to implement more stimulus. Scott is a strong advocate of the view that if the Fed were simply to announce a particular target, everything would fall in place to make sure it happens. For clarification, I fully agree with Scott and Brad that it would be possible for the Fed to achieve a higher inflation rate than 2%. My concern is with the robustness of the particular strategies for implementing such an objective. In particular, the fiscal management problem I am referring to is one of a rapid flight from dollars and loss of confidence in the Fed and Treasury. As I explained in my original post, this is the exact opposite of deflation. A strong Fed commitment to avoid deflation should not provoke market fears about the ability of the Treasury and Fed to manage their short-term liabilities. The question on which I and some of the Fed’s critics may differ is whether there is a similar robustness to the Fed’s announcing that what they’re trying to produce is, say, 3.5% inflation. My fear is that the practical instruments available to the Fed are too blunt, and the stability of the expectations equilibrium too tenuous, for us to be confident that the Fed could manage a multi-trillion dollar balance sheet if financial participants develop sudden doubts about how it will play out. […]

  42. Gravatar of Major_Freedom Major_Freedom
    7. May 2012 at 19:36

    ssumner:

    MR, Fed policy affects both money supply and money demand, often leaving P unchanged.

    You’re again conflating prices over time with what I am arguing, which is what prices would have otherwise been absent inflation/deflation of the money supply.

    It doesn’t matter if prices rise, fall, or stay the same over time. That’s not what inflation or deflation does. What inflation and deflation do is make prices higher or lower than they otherwise would have been absent the inflation or deflation at that time.

    We cannot really compare prices over time, because goods are constantly changing over time.

    Fed policy affects demand for money as a derivative effect of the Fed policy of monetary inflation/deflation.

    I am making counter-factual arguments, not temporal arguments. I cannot compare prices in 1950 with prices today. The goods and services are all different.

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