Kudlow on market monetarism
As a moderate supply-sider, I’ve always been a fan of Larry Kudlow. (Although he’s a bit more of a true believer than I am.) However in recent years I’ve disagreed with his views on monetary policy. TravisV sent me a Joe Weisenthal piece suggesting that Kudlow is becoming more sympathetic to market monetarism:
CNBC host Larry Kudlow is a throwback to an ’80s-style supply-side conservative, who has maintained that any interference in the free market is damaging, the dollar should be strong, and inflation is the primary evil against which the Fed should be on guard.
. . .
But following the election of 2012, and the improvement in the economy, the fever is breaking a bit, and a new strain of thinking on monetary policy is infecting the mainstream right.
And today in The National Review, Kudlow makes a stunning admission: Ben Bernanke might have been right all along.
Kudlow’s piece draws on the hot school of “Market Monetarists” who draw on the work of Milton Friedman to endorse the idea that the best Fed policy is one that pursues a Nominal GDP target.
This idea, that the Fed should pursue a stable Nominal GDP path has fans on Wall Street (Goldman’s Jan Hatzius is one), in academia (Scott Sumner, David Beckworth, Michael Woodford), at the Federal Reserve (Janet Yellen, the likely next Fed chair has all-but endorsed it), and various corners of the media (Ramesh Ponnuru, Ryan Avent, and Matt O’Brien).
Kudlow isn’t totally sold on it yet, and he’s still worried about gold prices and King Dollar, but he writes:
… if I have this story right, the market monetarists want the central bank to enforce a nominal GDP growth rule, which will avoid both deflation and inflation, and thus give fiscal incentives breathing room for a more rapid job-creating expansion.
I don’t agree with Bernanke’s unemployment target or his criticism of lower government spending. But I confess that he may have the monetary-stability story more right than I originally thought.
If gold remains soft, and King Dollar steady, perhaps the former Princeton professor deserves a little more credit. He may have gotten that story right.
In all seriousness, this is very cool. People don’t change their mind nearly enough, especially in the realm where politics meets economics.
A big share of the credit here for this shift definitely goes to Jim Pethokoukis, who has been using his perch at AEI to school conservatives about monetary policy, and to debunk the idea that Bernanke is some crazy reckless dove who is not worried about inflation at all.
In fact, Pethokoukis is holding an event tomorrow at AEI, featuring Ryan Avent, David Beckworth, and Scott Sumner on revamping the Fed and the idea of market monetarism. You’ll be able to watch it live online at noon, and hopefully get a glimpse of new monetary ideas on the right that aren’t all about hard money.
It’s been a very busy period for me. I did a one hour Econtalk with Russ Roberts that should be up on Monday. Yesterday I did the AEI panel. I was also interviewed by a Brazilian journalist. And today at 11:45am I’m scheduled to be interviewed on Larry Kudlow’s radio show. I believe it’s WRKO in Boston (syndicated nationwide.)
PS. I agree that Jim Pethokoukis deserves a lot of credit for selling market monetarist ideas to conservatives.
PPS. I plan to spend the next week or so working on taxes—so blogging will be slow. Another reason to abolish the income tax and replace it with a progressive payroll tax!!
I will get to the comment backlog today.
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23. March 2013 at 06:55
‘I agree that Jim Pethokoukis deserves a lot of credit for selling market monetarist ideas to conservatives.’
The value of a Northwestern education. Especially since they’re the 800 lb gorilla of the Fed Challenge.
23. March 2013 at 07:03
The video of the AEI panel is already up;
http://www.aei.org/events/2013/03/22/mend-it-dont-end-it-revamping-the-fed-for-the-21st-century/
23. March 2013 at 07:17
A payroll tax? Why not a progressive consumption tax?
23. March 2013 at 07:22
Thanks patrick.
Larry, A payroll tax is a consumption tax. The bedrock principle of public finance theory is in the long run a payroll and VAT are identical in incidence, albeit taxed at different levels. They differ only at the point where they are introduced.
23. March 2013 at 08:01
Wiesenthal’s claim that Yellen has endorsed an NGDP target “in all but name” is wildly overblown. He’s citing a Goldman Sachs memo that infers support of NGDP targeting from a series of Yellen speeches that solve for the optimal path of monetary policy with commitment – which, in general, implies policies along the way that appear suboptimal from a discretionary perspective.
This is an incredibly common idea in monetary economics – it receives tons of attention in Woodford’s book, as well as many papers on the zero lower bound that have nothing to do with NGDP targeting. Yes, NGDP targeting is related to this idea, but so is all level targeting (which also involves the idea of committing to suboptimal policies in the future to achieve stabilization today) and many other policies as well. It is remarkably reckless of the Goldman guys and Wiesenthal to be extrapolating form this to say that Yellen effectively endorses NGDP targeting – by the same standard, it would be equally easy to say that Bernanke endorses it.
23. March 2013 at 08:48
Scott – Great interview on Kudlow’s radio show. You crushed it. Larry sounded impressed. The second monetarist revolution continues.
23. March 2013 at 09:23
The AEI panel went well, nice job.
Is there a link somewhere to the interview on Kudlow’s radio show?
23. March 2013 at 10:41
Larry shouldnt be concerned with the dollar; the dolloar index has been doing nothing but going up since the feds QE3 announcemnt.
23. March 2013 at 10:42
Larry shouldnt be concerned with the dollar; the dolloar index has been doing nothing but going up since the feds QE3 announcemnt.
23. March 2013 at 14:31
The Kudlow radio podcast can be heard here;
http://www.stationcaster.com/player_skinned.php?s=1251&c=6381&f=1218021
Scott comes on about 67:10, so just push the little bar forward that point.
23. March 2013 at 14:59
The AEI panel was interesting, but it was one-sided. It would have been better to have a debate including analysts that are sceptical about NGDP targeting. Even then, I suspect that the debate would be more objective than in the UK, where I am sure that NGDP targeting – or more accurately, the SWITCH to NGDP targeting – is seen more as a quick fix for our more serious inflation and fiscal problems.
23. March 2013 at 17:14
Good job on the Kudlow show. You explained your position clearly. I was impressed with Kudlow as well. I think Kudlow’s optimistic pro-growth view of free markets would fit in better with market monetarism than his current gold standard advocacy. Hopefully, he’ll come on board.
23. March 2013 at 17:59
Another reason to abolish the income tax and replace it with a progressive
payroll tax!!You mean progressive consumption tax. Lose the payroll tax idea!!!
23. March 2013 at 19:30
Scott, As usual you are taking much too little credit. When I first heard of James Pethokoukis a couple of years ago he was writing anti-quantitative-easing screeds for the Weekly Standard and Commentary and palling around with John Taylor. Pethokoukis was not born a Market Monetarist; he was made, and I have no doubt that it was you (with maybe an intermediary or two) who made him what he is today.
23. March 2013 at 20:16
Publicly, I embrace anyone who joins Market Monetarism.
Privately, may I snipe a bit?
I have long said the right-wing would come over to monetary expansionism—but only after the 2012 election was over.
Sheesh, if Romney had won, and started a conflict with Iran, and if John Taylor had been made Fed Chief, Taylor would be printing money to the moon.
As it is, the righies know they lost 2012 but don’t want another four years down the drain. So, they accept monetary expansionism now, and maybe even Market Monetarism.
BTW, I do not believe the righties any worse or better than the lefties. But the righties know monetary policy better. That was one reason I think they were being so cynically opposed to monetary expansionism pre-election.
23. March 2013 at 20:29
If you want to sell NGDP targeting to conservatives / libertarians / non-leftists, just tell them that the idea is roughly Hayek’s and is consistent with his economics going back to the 1920s — Hayek is the 800 lb gorilla of conservatism and free market economics, whether poorly educated economists understand that or not.
23. March 2013 at 21:46
Prof. Sumner,
At the AEI event with Avent and Pethokoukis, you suggested as an aside that there is an association between volatile NGDP and asset price bubbles. Could you please clarify that reasoning? I don’t see the connection, given that NGDP was very volatile during the 1970’s and there weren’t any major asset price bubbles.
23. March 2013 at 22:31
I haven’t taken Kudlow seriously ever since he advocated invading Iraq in order to get $10/bbl oil.
But if he advocates market monetarism, I suppose I will give him some polite applause.
24. March 2013 at 00:53
Re your Kudlow interview: same comment; I would prefer to see you in a debate, Scott. For me, the trouble is that without challenge you make various points that I find dubious, such as referring to Australia as if the reason for its better economic performance was that it’s central bank had kept NGDP growth stable, with the result that I end up being sceptical about your whole argument.
24. March 2013 at 04:51
Hi Scott,
Do you have a link to the Brazil interview or can you tell us where/when it’s coming out? Brazil has had some “interesting” monetary policy to say the least so I’d be curious to know what they asked you about that.
24. March 2013 at 06:13
Everyone, Thanks for the nice comments.
Rebeleconomist, I agree, although I’d note that opponents were invited.
dtoh, Yes, I mean a progressive consumption tax, because payroll taxes and consumption taxes are identical.
Ben, I also thought that if Romney won then the right would embrace NGDP taregeting.
TravisV. In both the early 1930s and late 2008 NGDP was very volatile, and asset prices were extremely volatile. A “bubble” is really nothing more than extremely volatile asset prices over a frequency of years.
Federico, I’ll post a link when it goes on line. It was an interview for print media, ASAIK.
24. March 2013 at 22:50
Alright, I guess I need more help with Prof. Sumner’s “volatile NGDP encourages asset price bubbles” theory.
NGDP was volatile in the 1970’s but there were no major asset bubbles then. Seems like major contrary evidence to me.
Was an unusual surge in NGDP the reason why the stock market boomed prior to 1987? Prior to 2000? Prior to 2007?
Right now, my sense is that there’s not much relationship between changes in NGDP and the formation of asset price bubbles. However, I’m very willing to be enlightened and change my mind. My intuition could easily be wrong.
25. March 2013 at 05:39
[…] the comment section of this post by Scott Sumner, I came across an interesting exchange between TravisV and […]
25. March 2013 at 05:40
TravisV:
An attempt at answering:
http://thefaintofheart.wordpress.com/2013/03/25/bubbles-volatility/
25. March 2013 at 06:16
Marcus,
Thank you very much! You must be right, since you agree with me. 🙂
25. March 2013 at 06:46
TravisV, The 1970s did not have a period where NGDP growth suddenly slowed by 9%. I’ll try to do a post sometime.
27. March 2013 at 07:38
Benjamin Cole,
Since we’re not going to occupy a country with 75M people (three times Iraq), an Iran conflict would be limited to bombing military targets (similar to Iraq 1992-2002). Oil production would be mostly unaffected and the economic impact very minimal. Iran might try to close the strait but their military is mostly Photoshop and prayer.
BTW, I do not believe the righties any worse or better than the lefties. But the righties know monetary policy better. That was one reason I think they were being so cynically opposed to monetary expansionism pre-election.
Monetary policy isn’t like the filibuster, for which support is always dependent on who benefits — on policy the parties are generally no more cynical (or intelligent) than the latest opinion poll. The GOP is still genuinely afraid of inflation, which is why it’s noteworthy when someone like Kudlow comes around.
28. March 2013 at 21:25
“The 1970s did not have a period where NGDP growth suddenly slowed by 9%.”
The 1950s sure did:
http://research.stlouisfed.org/fredgraph.png?g=gY7
I don’t see any bubbles and collapses. But then we haven’t even defined them in terms of appearance, so…
14. July 2013 at 11:26
“..Since 1969 there has been a tremendous shift in the tax burdens away from the rich and onto the middle class. Corporate income tax receipts, whose incidence falls entirely on the owners of corporations, were 4% of GDP then and are now less than 1%. During that same period, payroll tax rates as percent of GDP have increased dramatically. The overinvestment problem caused by the reduction in taxes on the wealthy is exacerbated by the increased tax burden on the middle class. While overinvestment creates more factories, housing and shopping centers; higher payroll taxes reduces the purchasing power of middle-class consumers.
In an interview about the proposed “Buffett Rule”, T.J. Rogers the CEO of Cypress Semiconductor Corporation (CY) inadvertently illustrated the potential perils of overinvestment for an economy. Warren Buffett the CEO of Berkshire Hathaway Inc. (BRK.A) (BRK.B) had proposed the “Buffett Rule” which would impose a minimum tax of 30% on incomes above one million dollars. Rogers explained to Larry Kudlow on CNBC’s Kudlow Report on May 16, 2012, why he opposed the Buffett Rule. Rogers said that he spends less than 1% of his income on his living expenses and invests the other 99% in creating new businesses and increasing the productive capacity of the businesses he already owns. If he had to pay taxes pursuant to the Buffett Rule he would not be able to invest as much. Clearly, someone who invests 99% of their income will see his wealth grow exponentially as long as his investments are at all productive. It would not take too many members of the top 1% investing 99% of their income before they would be unable to deploy their capital productively. This would be a classic example of capital accumulating faster than consumers’ incomes. Consumers would not be able to buy all the goods and services produced by the over investment…”
http://seekingalpha.com/article/1543642-a-depression-with-benefits-the-macro-case-for-mreits
14. July 2013 at 14:04
“Corporate income tax receipts, whose incidence falls entirely on the owners of corporations”
That’s a bold statement!
14. July 2013 at 14:04
Presumably only smokers pay the costs of tobacco taxes and only consumers pay the cost of higher sales taxes.
14. July 2013 at 14:06
And the US savings rate has been falling for decades. Is the US really a country suffering from “overinvestment”?