Monetary policy should NEVER be used to solve problems

One thing that drives me nuts about my fellow economists is that they are always taking about monetary policy like it’s some sort of “tool,” which can be used to fix economic problems.  You can almost imagine policymakers rummaging through a toolbox, deciding whether to take out a tool labeled “MP” or a tool labeled “FP.”

That’s completely wrong.  If there is some sort of policy that you think needs fixing via monetary policy, then you have the wrong monetary policy regime.  You are targeting the wrong variable.  Thus you might (wrongly) decide it’s a good idea to target headline inflation at 2%, and then suddenly notice that that target conflicts with your gut instinct that unemployment is too high because of inadequate AD.  In that case the right decision is not to pull out the monetary policy tool, but rather to entirely abandon your inflation targeting regime.  If you have the right regime, then YOU SHOULD NEVER, EVER, ADJUST MONETARY POLICY.

For instance, in 2003 Ben Bernanke said NGDP is a good indicator of the stance of monetary policy.  Now suppose the Fed decides to target NGDP along a target path growing at 5% per year (i.e. level targeting.)  In that case, under no circumstances should monetary policy ever be adjusted.  It should always be set in exactly the same way, a policy stance expected to produce on target NGDP growth.  If unemployment is too high despite that target, and you think the target is appropriate, then the solution is not to adjust monetary policy or to do demand-side fiscal stimulus, rather you’d want to do labor market reforms.

As we saw in the previous post (actually two posts back), if you do sensible monetary policy then the policy won’t look like a tool.  You won’t see monetary policy fixing problems.  If you see cases where policymakers seem to be using monetary policy as a tool, they are not fixing problems, they are using monetary policy in the way an arsonist uses gasoline–they are causing the problem that (from the perspective of outside observers) they seem to be trying to fix.  Like that fireman who set fires so he could look like a hero putting them out.

Monetary policy should be boring, as it is in Australia; not exciting, as it is in the US and Japan.  Most of my readers think I am advocating use of monetary policy as a tool.  Most think I want it to be exciting.  Nothing could be further from the truth.

PS.  The Fed has been consistently coy about the question of whether they are missing their target, or whether 2% inflation is the wrong target.  You can find plenty of Fed statements to support either interpretation.  They create this ambiguity to deflect criticism, and they have successful fooled the press, Congress, and most economists.

PPS.  I don’t doubt that I am guilty (in previous posts) of the same things I criticize others for here.  I’ve probably referred to monetary policy as a “tool.”

PPPS.  Off topic, but my “job-filled non-recovery” theme seems to have become trendy.  Here’s Matt Yglasias:

The hot new topic to address this week is that in the early months of 2012 we appear to be witnessing the reverse of a “jobless recovery,” an economic growth cycle in which the increase in gross domestic product is not large enough to justify the quantity of net job creation.

Here’s a post I did on December 2nd, and another on February 3rd, on the same issue.


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51 Responses to “Monetary policy should NEVER be used to solve problems”

  1. Gravatar of Karl Smith Karl Smith
    12. March 2012 at 17:46

    Scott, yes but this only works if you have the perfect regime, which will be true for any policy system.

    We would never have to “fix” a foreign policy problem if we always had the right foreign policy regime. We would never have to fix a health care problem if we have the right health policy regime.

    The precise reason one has problems – that is bad things for which effective corrective action can be taken – is because the regime does not automatically adopt the proper stance.

    Now you may argue that an NGDP futures market with Fed targeting would be such a regime, but it is clearly not the regime we have now.

  2. Gravatar of John Hall John Hall
    12. March 2012 at 17:56

    When will Scott Sumner break out the dreaded PPPPPPS

  3. Gravatar of Morgan Warstler Morgan Warstler
    12. March 2012 at 18:07

    WINNER!!!!! Morgan WINS!!!!!

    Finally, after two god damn years, Scott FINALLY writes a paragraph the furthers the debate in a way that liberals can no longer find solace in what Sumner writes….

    “For instance, in 2003 Ben Bernanke said NGDP is a good indicator of the stance of monetary policy. Now suppose the Fed decides to target NGDP along a target path growing at 5% per year (i.e. level targeting.) In that case, under no circumstances should monetary policy ever be adjusted. It should always be set in exactly the same way, a policy stance expected to produce on target NGDP growth. If unemployment is too high despite that target, and you think the target is appropriate, then the solution is not to adjust monetary policy or to do demand-side fiscal stimulus, rather you’d want to do labor market reforms.”

    Attention all ye children gather round and let Uncle Morgan clue you into what this means:

    NOW we are down to one calculation / discussion point

    What is the NGDP level target? And that is really just a short term question, in the end all roads lead to Rome.

    BUT, starting with a lower one forever more, will put tighter immediate screws to liberals, and we like that.

    BUT, since “opportunistic disinflation” onward, it has been 100% obvious, we have had a Fed that was determined to get inflation under 2% over the long term and keep it thtere.

    They announced it, we knew it. Selah.

    So we’re <2% on inflation with an expectation <3% RGDP, so we settle in on:

    4 or 4.5% NGDP.

    —-

    Now that Scott has said that once we lock down, NGDP… "If unemployment is too high despite that target, and you think the target is appropriate, then the solution is not to adjust monetary policy or to do demand-side fiscal stimulus, rather you’d want to do labor market reforms."

    We know what the Fed today REALLY means:

    1. screw Obama
    2. the government needs to crush public employee unions.
    3. the government needs to drill baby drill.
    4. and generally, the government need to act like my ilk are poking it with hot irons whenever it slows down on the path to becoming AntiDeKrugmanistan

    It really does help to just think of what happens:

    1. if in 2003 we adopt 4.5% level.
    2. we follow Scott's very demanding paragraph.

    It is unarguable. the effect is no houses for bad credit risks, and no raises for public employees – and that means everything today is FINE.

    All blame flows to Democrats where it belongs.

  4. Gravatar of marcus nunes marcus nunes
    12. March 2012 at 18:08

    Scott
    1. I wonder what the hell all the conferences and papers on MP at low inflation were good for. In one of the very first Bernanke presented his now(in)famous “Self-induced paralysis” paper.
    2. Ezra Klein in a Wonkbook piece today also discusses the “job-filled non recovery”. I´ve estimated a post (Korean) war Okun “Law”. Preliminary comments:
    (a) 1984 and 2009 are on the regression line in opposite extremes.
    (b) There´s nothing “special” about 2010 (very close to the regression line).
    (c) 2011 is what´s “bugging” Yglesias and Ezra. It´s far below the regression line (growth much lower than the “recommended rate”). An equivalent “error” was noticed in 1974 (first oil shock time). But unemployment rose quite a bit in 1975 (delayed effect?) and the “error” “symetrically” jumped to the other side of the regression line.

  5. Gravatar of Justin Irving Justin Irving
    12. March 2012 at 18:24

    “Conventions around dead people are ridiculous. The world outlook is slightly improved with @AndrewBrietbart dead.”-Matt Yglasias

  6. Gravatar of Rajat Rajat
    12. March 2012 at 18:30

    Monetary policy should be boring, as it is in Australia

    Ha, that’s a good one! Check out any Australian online newspaper at 3pm on the first Tuesday of each month (the RBA announces its rate decisions at 2:30pm). I guarantee you that the cash rate will be the top story. This is mainly because most people are on variable-rate mortgages and those rates vary closely with the RBA’s cash rate. The Fed’s decisions may be interesting to Fed-watchers, but the RBA’s decisions are followed by just about everyone in Oz.

  7. Gravatar of John Thacker John Thacker
    12. March 2012 at 18:31

    “The Fed has been consistently coy about the question of whether they are missing their target, or whether 2% inflation is the wrong target. ”

    I find quite a lot of people who think that the 2% inflation target is a ceiling, not a target. Do some on the Fed think that way?

  8. Gravatar of Manny C Manny C
    12. March 2012 at 18:55

    Morgan,

    I don’t know what drugs you’re on, but they are dangerous.

  9. Gravatar of Manny C Manny C
    12. March 2012 at 19:01

    Rajat,

    Knowing your comments over at ricardianambivalence.com, I suspect you know that Scott means by Australia having boring MP.

    TBH all the hysteria re cash rate decisions is a bit, well, hysterical. The impact on average mortgage is so minor, that it should be irrelevant. To mix metaphors: at 25bps rise means fewer milkshakes, not less schooling for your kids. If someone finds themself in the latter situation, then they are too dumb to be prudent and deserve the pain.

  10. Gravatar of Bonnie Bonnie
    12. March 2012 at 19:34

    This is a great post.

    When I think about this issue, I take it a little farther to look at MV=PY like it isn’t just a monetary theory, just like Friedman wasn’t just an economist, although it can be viewed that way. In everything he did, he preached MV=PY even though he wasn’t saying it quite that way. I don’t know if you’ve ever seen the video of Friedman admitting that he was once a socialist, and he talked about why he felt that way and what changed his mind. It’s worth watching if you haven’t seen it. I will try to find the link for those who might be interested, otherwise I stumbled on it on YouTube if you feel like searching.

    I see MV=PY as a basic building block that is most conducive of building and maintaining a society of self sufficiency, and serving the best interests of that society by stabilizing other elements such as the political system. He may not have been spot on in all the details, but he made the basic point for others to improve upon. And unlike some of our well intentioned countrymen, I believe he recognized that a more civil way to boost the purchasing power of the dollar and leave everyone better off in the process is with supply-side deflation from more economic freedom, increased competition, etc…, rather than taking the shortcut of monetary deflation that robs swaths of a society of their dignity and self sufficiency, to put it mildly, stimulates the outcry for more government and dependency, leaving no one better off on the other side.

    There are certainly some good points to other theories that get tossed about, but this one seems to make perfect sense and comes with an entire package of beneficial possibilities for society as a whole that does not form philosophical paradoxes, at least on the surface, that others seem to lack.

    I hope I am not destroying the appearance or intention of political neutrality regarding MM, but the theory can be looked at as only a monetary theory if that is what one chooses, and it will still work even if the intent is to never make any public policy changes. While I strongly favor supply-side reform, I would be happy, at least for today, if we could use it as a basis for monetary policy and quibble about the rest of the details later.

  11. Gravatar of Donald Pretari Donald Pretari
    12. March 2012 at 20:02

    It’s never a good idea to say never.

  12. Gravatar of Greg Ransom Greg Ransom
    12. March 2012 at 20:06

    “Cementing the embryonic recovery in risk appetite, credit and equity
    values and the economy itself will almost certainly require a more decisive recovery in private shadow money and the effective money stock.”

    — economists Jonathan Wilmot, James Sweeney, Matthias Klein, and Carl Lantz “Long Shadows: Collateral Money, Asset Bubbles and Inflation” May, 2009.

    http://faculty.unlv.edu/msullivan/Sweeney%20-%20Money%20supply%20and%20inflation.pdf

  13. Gravatar of Socialist_AK-47 Socialist_AK-47
    12. March 2012 at 20:23

    I want the same drugs Morgan is on. Meanwhile in France, conservative Sarkozy is getting his ass kicked so bad by socialist Hollande that he is resorting to targeting tax exiles. Capitalism is dead.

    http://www.reuters.com/article/2012/03/12/us-france-election-tax-idUSBRE82B1FE20120312

  14. Gravatar of Steve Steve
    12. March 2012 at 20:48

    I’m always bothered by the economists who complain that “monetary policy shouldn’t be set by the calendar” but rather it should “respond to changing conditions.” It’s usually the Fed hawks saying that. The profession is obsessed with a “monetary reaction function” targeting the past rather than the future.

    I just proposed on Lars’ blog using the turn of phrase “Credibility is earned with long and variable lags” but monetary policy is immediate. I dunno, I’m just trying to help with the marketing effort.

  15. Gravatar of Lorenzo from Oz Lorenzo from Oz
    12. March 2012 at 22:47

    Rajat: tell me, do you think the attention paid to what the RBA does make it more or less accountable than the Fed? (Just asking …)

  16. Gravatar of Lorenzo from Oz Lorenzo from Oz
    12. March 2012 at 22:55

    Rajat: And the fuss about mortgages is because of our disastrous permit raj in land use. (There being no such thing as a good permit raj.) It makes Australian (!) housing the most expensive (pdf) in the Anglosphere.

    Since 1990, owner-occupied and investment property credit has expanded its share of total credit from 23 to 59 percent. (Business credit has dropped from 63 to 34 percent.) In the same period, housing debt has gone from 34 to 135 percent of household income. (Stats from here.)

    Australia has become a country highly leveraged on regulatory approval. That’s why all the fuss over variable interest rate mortgages.

  17. Gravatar of Brito Brito
    12. March 2012 at 23:43

    Scott, I’m going to a seminar by a member of the monetary policy committee at the Bank of England today, anything you think I should ask him?

  18. Gravatar of W. Peden W. Peden
    13. March 2012 at 01:15

    Brito,

    If I may say so, it would be interesting to hear the response to the question “In 2008, was it inflation or money GDP which offered the optimal basis for decision-making?”

  19. Gravatar of Brito Brito
    13. March 2012 at 02:06

    Does money GDP mean the same as NGDP? Also this economist has only been on the MPC since 2009.

  20. Gravatar of W. Peden W. Peden
    13. March 2012 at 02:57

    Brito,

    Yep. It’s the term with which older British economists (like Sam Brittan) are familiar.

    Well, I suppose there’s probably a better question.

  21. Gravatar of Britmouse Britmouse
    13. March 2012 at 04:01

    The MPC can bait and switch as well as the Fed. I’d push them on what specifically they are targeting. They have failed to stabilize headline CPI. OK, fine. But they they have also failed to set policy such that their internal forecasts for the CPI rate is stable at 2% looking 2/3 years out.

    http://uneconomical.wordpress.com/2012/02/20/forecast-to-fail/

  22. Gravatar of John John
    13. March 2012 at 04:15

    This post finally contradicted my idea that you were a dangerous monetary crank.

  23. Gravatar of ssumner ssumner
    13. March 2012 at 05:07

    Karl, I think you misread the post. I agree that we don’t have the right regime. And I’d concede that NGDP may not be the right regime. My claim is that we should not react to this information by trying to fix economic problems, we should try to react by trying to fix the economic regime. We aren’t doing that. The Fed isn’t changing it’s regime. Why not?

    John Hall, Never.

    Morgan. I finally agree with you, or you finally see what I’ve been saying all along?

    Marcus, Yes, there may be some lags with unemployment, and perhaps a lower trend rate of RGDP growth.

    Justin. How does that relate to anything?

    Rajat, But remember, interest rates aren’t monetary policy, they are a barometer of the economy.

    John Thacker, Yes, some do.

    Bonnie, Yes, it’s a building block for good policies in other areas.

    Donald, Not never, just rarely a good idea.

    Greg, I have no opinion either way on that.

    Socialist. So it’s not true that the PIGS are being forced into market reforms? The French have always talked a good anti-capitalist game, but reality has always been more complex. Singapore and Hong Kong with their 15% to 20% top rates are more representative of the future of the world economy than France.

    Steve, Yes, the effect is immediate.

    Brito, Ask him if the BOE sees it’s jobs as being to prevent fiscal austerity from having any negative effects on NGDP and inflation. And if not, why not?

    John, Glad to hear that.

  24. Gravatar of ivona poyntz ivona poyntz
    13. March 2012 at 06:00

    I don’t know about a blanket ban on monetary policy adjustments, but I certainly agree recent QE was wrong

  25. Gravatar of Morgan warstler Morgan warstler
    13. March 2012 at 07:22

    Scott you just havent said it. John proves it. You need to ask yourself how many conservatives think you are a monertary crank because you don’t say this enough.

    Justin, don’t worry Matt’s dead mom margaret joskow is now offending 40 unique twitter users per hour.

    Next she will:

    Read 800+ obit rss feeds.

    Compile list of dead people daily.

    Search twitter to collect posters who have mentioned each dead person, this is a big sort.

    Verify klout and retweet likelihood of each poster.

    Offend the 150 posters per hour most likely to freak out about hearing someone they appreciate is dead and copy Matty.

    The last bit is whether i use the novel written by Matt’s dad about her death to help Margaret compose responses, depending on my grief level.

    At which point I’m going to walk away and let Matt’s mom haunt twitter like some kind of hateful ghoul for eternity.

    At least until Matt apologizes and deletes the post.

  26. Gravatar of OGT OGT
    13. March 2012 at 08:03

    I went back and read the Feb 3 post, I think the problem of the job-full non-recovery may just be measurement error. Gross Domestic Income has been above GDP for a number of quarters, and past GDP estimates have been generally revised closer to GDI.

    http://www.esa.doc.gov/Blog/2012/02/29/economic-indicator-gdp-gdi-surprise-personal-income-and-saving-revised

    When all the revisions are in, I don’t think there will be a big disconnect.

  27. Gravatar of Major_Freedom Major_Freedom
    13. March 2012 at 08:18

    After reading Morgan’s posts, I have come to realize I am not even the most eccentric one on this board. Wow. That guy is one strange cat, even for me.

  28. Gravatar of Philo Philo
    13. March 2012 at 08:45

    Text: “If you have the right regime, then YOU SHOULD NEVER, EVER, ADJUST MONETARY POLICY.”

    Comment: The distinction between *action* and *inaction* must have much practical importance, since it pervades ordinary language, but it really has no place in our thinking about monetary policy. It is quite useless to concern oneself with what would count as “adjusting” monetary policy, and what would count as merely “maintaining” it or keeping it steady, etc. I am reminded of the theological dispute about whether God “intervenes” in the course of nature, or rather simply lets things run on as He determined at the start. Such talk deserves to be dismissed as non-significant (especially by a self-proclaimed pragmatist).

  29. Gravatar of mbk mbk
    13. March 2012 at 08:47

    Scott, I keep discovering new bits and pieces of your view of MP that suddenly make whole swathes of you blog appear in a different light. That happens because by necessity a blog is a reactive thing and it comes in little pieces. It is not a whole.

    To be completely understood, you _must_ write a book. Not papers, not blog posts, not interviews. A position book on what monetary policy can do, what it can’t do, what it ought to do, and why. According to you.

  30. Gravatar of Cthorm Cthorm
    13. March 2012 at 08:58

    @Morgan

    Has Matt blocked the Joskow handle yet? Does he have to delete the post – I think an apology would be good enough.

    Also – I think you are unfortunately dead wrong about what the Fed is doing now. They are not NGDP targeting, and they are not really targeting 2% inflation. They are just coasting in neutral within the bounds of 2% inflation and current unemployment. This is not a target, this is bumper bowling. They should just throw the damn ball straight down the lane and target NGDP at X%. I think most of the benefits will come just by making monetary policy endogenous and predictable.

    @Scott

    I’m in the odd position of trying to convince one of my old college professors, who was a Senior Economic Advisor at the Cleveland Fed from 1994-2007, that a nominal income target is the best target. He currently favors an inflation target but concedes that it all depends what model you have in your head. Now I don’t think I’ll have much trouble showing that nominal income makes more sense than inflation (supply shock situation, where infl target would tighten while NGDP would stay neutral or ease). He agrees that an explicit target is clearly better than discretion, at least in theory. Where I’m not quite comfortable is showing why Futures targeting is the best way to target. How do you envision NGDP Futures targeting working, in a framework similar to other futures (i.e. strike price, maturities, option prices). Does the Fed make it’s ease/tighten decisions based on the option price spreads (e.g. a 5.2% NGDP strike put vs a 4.8% NGDP strike put)? What maturities is it concerned with (M+1,Q+1,Year end,Y+1,Y+3)?

  31. Gravatar of Major_Freedom Major_Freedom
    13. March 2012 at 09:11

    Cthorm:

    They should just throw the damn ball straight down the lane and target NGDP at X%.

    No individual investor invests into, and no individual seller sells into, NGDP.

    NGDP can be credibly promised to rise by 5%, and it won’t mean diddly squat to individual investors or sellers.

    The last time I checked, individual investors and sellers do not make decisions based on NGDP, but rather by the demands in their own individual markets, which can rise or fall no matter what happens to NGDP.

  32. Gravatar of Neal Neal
    13. March 2012 at 09:28

    I disagree, Scott, although trivially. Good monetary policy IS a tool that DOES solve a serious, even chronic, problem: bad monetary policy.

  33. Gravatar of Cthorm Cthorm
    13. March 2012 at 09:40

    @MF

    Bull. A credible NGDP growth path equivalent to 5% per annum means a hell of a lot in the current US economy. Take Municipal bond issuers (i.e. individual sellers), it may not be explicit, but they issue debt on the presumption that there future tax revenues will be sufficient to finance the debt. If NGDP is allowed to fall 10% from the prior trend, debt issued before the trend switch will consume a much larger share of revenues.

    If NGDP is growing at a 5% pace, like the 1990s or early 2000s, then I’d be more willing to forgo current job opportunities to get an MBA or a PHD or an MFE or an STFU, because I have a reasonable assurance that the job market won’t crater and leave me with excessive debt and no major increase in wages from my investment.

    Like Selgin said, a little knowledge is a dangerous thing. You have an obsession of (your distorted understanding) Hayek’s work. Yes, it is a fatal conceit to think a central authority can plan the economy. NGDP targeting does not do that, it in fact does the opposite. It allows individuals to make decisions based on a consistent monetary/economic framework.

  34. Gravatar of Mike Sax Mike Sax
    13. March 2012 at 09:59

    Morgan you realize there was no post? Ygelsias made the offending comments on twitter.

    Tell you what, how about Yglesias applogized for it after Breitbart apologizes for what he said when Kenndey died. Oh, wiat I guess he can’t do that now.

    For some perspective for all this breastbeating here is what Breitbart said, little more than minutes after Ted Kenndy had died:

    “Andrew Breitbart, a Washington Times columnist who oversees Breitbart.com and BigHollywood.com, tapped into the anti-Kennedy vein in the hours after the senator’s death was announced, posting a series of Twitter messages in which he called Kennedy a “villain,” a “duplicitous bastard” and a “prick.”

    “I’m more than willing to go off decorum to ensure THIS MAN is not beatified,” Breitbart wrote. “Sorry, he destroyed lives. And he knew it.”

  35. Gravatar of Morgan warstler Morgan warstler
    13. March 2012 at 10:45

    I don’t care what gets said about ted kennedy the woman killer or his rapist brother.

    I care enough about Matty’s behavior in that single tweet to respond in my own way. This is what force of will and credible dference is al about in a world of individuals

    If matt is OK with his mother claiming credit for what he has become, for what she has created he can go about his merry way.

    Matt says conventions around the dead are ridiculous, I’m letting his mother be that ultimate expression.

    Cthorn, I don’t care if he is sorry I want him to apologize deleting the tweet will be how the daemon stops.

    Major I’m certainly not normal, but none of us really is.

    Scott, note even mbk sees this as a wild deviation from how you normally describe things, it shouldn’t be that hard to convince you….

    If you won’t believe me whose forgotten more rhetoric than most learn, take the feedback statistically proven in these comments – what you think you say is not what people hear.

  36. Gravatar of Major_Freedom Major_Freedom
    13. March 2012 at 10:54

    Cthorm:

    Bull. A credible NGDP growth path equivalent to 5% per annum means a hell of a lot in the current US economy. Take Municipal bond issuers (i.e. individual sellers), it may not be explicit, but they issue debt on the presumption that there future tax revenues will be sufficient to finance the debt. If NGDP is allowed to fall 10% from the prior trend, debt issued before the trend switch will consume a much larger share of revenues.

    Municipal bond issuers don’t tax the entire country, where the NGDP statistic resides.

    I was talking about individual investors and sellers. You come back with a government agency that doesn’t even relate to NGDP.

    If NGDP is growing at a 5% pace, like the 1990s or early 2000s, then I’d be more willing to forgo current job opportunities to get an MBA or a PHD or an MFE or an STFU, because I have a reasonable assurance that the job market won’t crater and leave me with excessive debt and no major increase in wages from my investment.

    You’d only select education over a job if the payoffs to you are greater. That is quite independent of NGDP. One can believe that taking a job is better than getting an education even if NGDP is uncertain. As long as their own circumstances lead them to choosing a job, that’s what they will do.

    With a 5% NGDP, it is quite possible in your circumstance that wages are too attractive relative to what you might expect in the future after increasing your education, for you to leave the workforce and increase your education. One would weigh the costs and benefits of their own situation, and their spending will in part DETERMINE what NGDP becomes (other economic actors, the rest of the government, and the Fed being the other parties).

    You are just making it up that you will take NGDP into account when making decisions. I mean, you have the opportunity to move to Australia where NGDP is the de facto policy, but you’re not choosing to move there. Why? Because the costs outweigh the benefits to you. The EXACT same principle applies within an NGDP targeting country.

    Like Selgin said, a little knowledge is a dangerous thing.

    Everyone has a little knowledge, relative to the sum total of all knowledge that exists and that can ever be learned.

    You have an obsession of (your distorted understanding) Hayek’s work.

    You haven’t shown how I have a “distorted” understanding of Hayek’s work. Easy to say, difficult to prove.

    Yes, it is a fatal conceit to think a central authority can plan the economy. NGDP targeting does not do that, it in fact does the opposite. It allows individuals to make decisions based on a consistent monetary/economic framework.

    That’s like saying a prison allows prisoners to make decisions based on a consistent geographical framework.

    NGDP targeting is in fact a form of central planning, despite your silly protestations otherwise. The Fed is not a free market institution. It is a central planning institution. It centrally plans the economy’s money and spending! The state owns and controls the printing press. You’re quite incorrect in claiming that the existing state monopoly of money production (and thus interest rates) is somehow conducive to individuals making their own decisions and “the opposite” of central planning. You cannot be more wrong. Central banking is a central planning institution! Centralized banking is one of the ten planks of communism in Marx’s Communist Manifesto for crying out loud.

    Individuals can only make decisions freely if the concept of property rights is extended into the area of money production no less than computers, shoes, and t-shirts. As long as the state controls the money, any talk of individuals being free to make decisions, and any talk about no central planning, displays a deep ignorance on the nature of central planning, and the world.

  37. Gravatar of Morgan warstler Morgan warstler
    13. March 2012 at 10:56

    Yes Matt has blocked twitter handle he has to get bounces through replies.

    I’m sure though he has heard about her. Someone contacted me and I refused comment.

    Personally part of me thinks to joskow (to speak ill of the dead) deserves to be a verb, maybe Matt is right and 1’M people per year should be reminded of his insight.

    But the DM and effeors at AI replies should make for an interesting blog under her name.

    Maybe the nea will give her a grant for performance art.

  38. Gravatar of Mike Sax Mike Sax
    13. March 2012 at 11:29

    Morgan you said:

    “I don’t care what gets said about ted kennedy the woman killer or his rapist brother.”

    “I care enough about Matty’s behavior in that single tweet to respond in my own way. This is what force of will and credible dference is al about in a world of individuals”

    “If matt is OK with his mother claiming credit for what he has become, for what she has created he can go about his merry way.”

    And you wonder why you Righties are held in such low regard by the general public and Limbaugh has no advertisers anymore?

    I don’t much care about Breitbart. He was a thoroughly ireedemable person as far as I can see. If there was anything good to say about him I don’t know it.

    You going after Yglesias’ mother is so childish and stupid that you ought to be Rush’s sidekick.

    As Breitbart doesn’t care about what’s said about the dead I got no clue why you think you have any leg to stand on in your childish temper tantrum.

    Breitbart was a rank smear merchant. Whatever Kennedy did at least was not deliberate. Breitbart deliberately destroyed lives and you can put that in your pipe and smoke it.

  39. Gravatar of Morgan warstler Morgan warstler
    13. March 2012 at 12:24

    Sax if this was about right and wrong good lord that might be an interesting and endless debate, this about what i think and am willing to do and what Matt thinks and is wiling to do.

    Throw out your philosophy textbook, This is about should not ought, this is about how traffic merges when there aren’t any stop .

    On rush you have no clue – on pure strategic terms I prefer a newer younger savvier better looking young Turk on the mic, one who argues more like me.

    The market need doesn’t go away when a brand gets tarnished. You hate the man, I love his listeners. Overtime, you’ll see rush wasn’t the best guy for leading them… A different man with the same audience could hurt your ideas twice as much.

  40. Gravatar of Mike Sax Mike Sax
    13. March 2012 at 12:51

    Don’t worry about me Morgan. No one’s hurting my ideas. You screaming at Matt Yglesias’ mother isn’t going to hurt them that’s for sure.

    Hey maybe new better Right wing hosts are coming. David Frum thinks Hucabkee is the man to do it-though he’s not partiucarly a “young, better looking turk.”

    Hucabkee seems like a nice man-compared to your Libamughs’ or your Breitbarts with their emotional, personal attacks.

    What may be a problem for any “traffic” you may be banking on Morgan is this:

    Not only are the big boy advertisers pulling out on Rush but they want to pull out on all the Rush clones. They also don’t want to be on Beck-he’s already been kicked off the tv now they don’t want him on radio either.

    Nor do they want Hannity, or Beck, or Mike Savage. No matter how you want to look at it buddy, the Rush Limbaugh business model which served the Right very well in it’s time now has peaked-and this is what Frum says as well.

    In the future, Right wing talk show hosts will have to be a little more resrained in their attacks on the ladies, the minorites, etc.

    We’ll see how much that restrains the overall conservative movement. but there will have to be an adjustment.

    The heyday of American conservatism is already over. I’d place it from about 1968-2006. That was the age that William F. Buckley dreamed of, as his book put it “Dream Walking.” In the 90s there was nothing but Right wing radio. You guys controled the more interesting part of the media.

    But the rise of the Internet and satelitte radio leveled the playing field.

    Right wing radio appeals to middle aged white guys. They love the jokes about people not like them. However today the advertisers want the 25-54 women.

    They know they can’t get the soccer moms listening if they insult them all day.

  41. Gravatar of vincent vincent
    13. March 2012 at 12:51

    @Morgan, you have cranked up the creepy right up to 11.

  42. Gravatar of The bad side of independence? » TVHE The bad side of independence? » TVHE
    13. March 2012 at 14:07

    […] This issue is discussed more sensibly on the Money Illusion.  Choice quote: Monetary policy should be boring, as it is in Australia; not exciting, as it is in […]

  43. Gravatar of Cthorm Cthorm
    13. March 2012 at 14:25

    @MF

    Against my better judgement I’ll respond.

    Municipal bond issuers don’t tax the entire country, where the NGDP statistic resides.

    I was talking about individual investors and sellers. You come back with a government agency that doesn’t even relate to NGDP.

    I chose Municipal issuers because it is one of the easiest to see the connection between the overall economy and individual finance decisions. The fact that they don’t have a national tax base is irrelevant. It is analogous to how a Tire Manufacturer’s performance is in some part determined by the overall performance of the larger Automotive Manufacturing industry. The point is not to try and pre-decide what the relative performance of any given group or individual is, but to AVOID the situation of inappropriate M policy action (e.g. 2008 rate hike) causing a second or third-wave of economic distress.

    You’d only select education over a job if the payoffs to you are greater. That is quite independent of NGDP. One can believe that taking a job is better than getting an education even if NGDP is uncertain. As long as their own circumstances lead them to choosing a job, that’s what they will do.

    Obviously I make my own cost-benefit analysis, but it’s daft to think that I make that analysis without some context of the overall economy. This is a problem of marginal thinking, not the micro costs/benefits. For decisions on the margin a major change in any factor, including expected NGDP growth or the prospect of increased regulation or demand for a specific skill set, could change the optimal decision.

    That’s like saying a prison allows prisoners to make decisions based on a consistent geographical framework.

    Again, this is a bizarre argument to be having. Things are no so black and white, there is a sliding scale. On the scale of central planning – laissez faire capitalism, NGDP targeting is closer to laissez faire than the existing policy regime. That is the relevant comparison, not whether Free Banking or a Privatized Central Bank or a non-independent Central Bank is better. I also think property rights deserve far stronger protection than they currently get. I favor Free Banking and currency competition. But I also think those things can coexist in the context of a USD tied to a NGDP targeting regime. I welcome any move in such a direction, but I think NGDP targeting has the greatest chance of arriving first.

  44. Gravatar of cato cato
    13. March 2012 at 15:32

    re: recovery – this doesn’t seem to be too much of an explanatory problem.

    a year ago you’ve got firms with under-utilised workers. they ramp up the revenue curve, hit full utilisation then have to higher more people. production doesn’t jump by the full potential output of these workers instantly.

  45. Gravatar of ssumner ssumner
    13. March 2012 at 17:38

    Morgan, Get over it.

    OGT, Yes, I’ve discussed that possibility as well.

    Philo, In a more recent post that criticizes DeLong I bring that point up in a way that might make more sense.

    mbk, I plan to.

    Cthorm, Unfortunately, I just don’t have time to discuss it in detail, you might google my post “spot the flaw in NGDP futures targeting.” I also have a journal article in “Contributions in Macroeconomics” 2006. Basically the Fed doesn’t make decisions, the market sets the money supply and interest rates at a level expected to produce on-target NGDP growth.

    Neal, I certainly agree with that!

    Mike and Morgan, You guys don’t have better things to do with your time?

    Cato, It’s seems unusual to me, relative to previous recoveries (when GDP tends to grow above trend.)

  46. Gravatar of Major_Freedom Major_Freedom
    13. March 2012 at 18:46

    Cthorm:

    Against my better judgement I’ll respond.

    Is this supposed to make me feel insulted in some way?

    Municipal bond issuers don’t tax the entire country, where the NGDP statistic resides.

    I was talking about individual investors and sellers. You come back with a government agency that doesn’t even relate to NGDP.

    I chose Municipal issuers because it is one of the easiest to see the connection between the overall economy and individual finance decisions. The fact that they don’t have a national tax base is irrelevant.

    No, it is quite relevant, because you said they lend taking taxation into consideration. But municipalities don’t tax out of NGDP, they tax out of their own local spending, which is not NGDP.

    It is analogous to how a Tire Manufacturer’s performance is in some part determined by the overall performance of the larger Automotive Manufacturing industry.

    LOL, epic conflation of correlation and causation. No, the aggregate performance of the tire manufacturing industry is determined exactly by the performances of the individual tire manufacturers.

    The point is not to try and pre-decide what the relative performance of any given group or individual is, but to AVOID the situation of inappropriate M policy action (e.g. 2008 rate hike) causing a second or third-wave of economic distress.

    Yes, I know the theory. The problem is that you’re not connecting it to the real world.

    You’d only select education over a job if the payoffs to you are greater. That is quite independent of NGDP. One can believe that taking a job is better than getting an education even if NGDP is uncertain. As long as their own circumstances lead them to choosing a job, that’s what they will do.

    Obviously I make my own cost-benefit analysis, but it’s daft to think that I make that analysis without some context of the overall economy.

    It’s daft to make decisions based on some abstract aggregate statistic, rather than the specific circumstances of your affairs, i.e. the specific expectations of demands, costs, and benefits.

    This is a problem of marginal thinking, not the micro costs/benefits. For decisions on the margin a major change in any factor, including expected NGDP growth or the prospect of increased regulation or demand for a specific skill set, could change the optimal decision.

    Then why don’t any businesses use NGDP expectations and estimates in their business decisions? I’ve worked in many firms, and I have worked for myself, and I have never in my own affairs, nor in anyone else’s affairs, ever once altered a business decision based on NGDP estimates and expectations. Never. What does that tell you? If NGDP really was an integral aspect of individual decision making, you’d think at least SOME firms to be utilizing it.

    That’s like saying a prison allows prisoners to make decisions based on a consistent geographical framework.

    Again, this is a bizarre argument to be having. Things are no so black and white, there is a sliding scale. On the scale of central planning – laissez faire capitalism, NGDP targeting is closer to laissez faire than the existing policy regime.

    First, anyone who says it’s wrong to make black and white arguments are contradicting themselves, because that is itself a black and white argument. Second, black and white arguments derive from the law of non-contradiction, of true and false, of right and wrong. The world is, contrary to your believe, a place of “black and white.” Any attempt to deny this is a black and white argument. Third, again, what you’re saying is like saying an open concept prison is closer to freedom than a cage system prison, as if I’m supposed to be all happy and satisfied that the central bank is changing its printing policy.

    You’re window dressing a central planning agency. You cannot argue that a central planning agency in money production, can get “closer” to laissez faire simply by changing the speed at which it prints money. Don’t make me laugh. You might as well say a prisoner is closer to having freedom if the prison guards change their shift patterns.

    That is the relevant comparison, not whether Free Banking or a Privatized Central Bank or a non-independent Central Bank is better.

    No, the relevant comparison is freedom versus violations of freedom. Abolition of the central bank is a movement towards freedom. The central bank changing the speed at which it prints money is not a movement towards freedom.

    I also think property rights deserve far stronger protection than they currently get. I favor Free Banking and currency competition. But I also think those things can coexist in the context of a USD tied to a NGDP targeting regime. I welcome any move in such a direction, but I think NGDP targeting has the greatest chance of arriving first.

    Currency competition will collapse the USD and hence the federal reserve system.

  47. Gravatar of Morgan Warstler Morgan Warstler
    14. March 2012 at 05:16

    Sax,

    Against my better judgement I’ll respond.

    You don’t seem to disagree with me until you get around to hoping the things you see happening are bad for my team.

    “In the future, Right wing talk show hosts will have to be a little more resrained in their attacks on the ladies, the minorites, etc.”

    1. who cares?
    2. you don’t listen to a lot of talk radio. The new Imus is the same as old Imus. more importantly, you just ok’d another 20 years of Rush just as long as he doesn’t call a girl a slut. which isn’t really ok with me.

    You don’t seem to understand my assumption: liberals are dumber than conservatives – at the top of the game, in big terms, you end up with Sumner vs. DeKrugman or in little day-to-day terms, Me vs. Matty.

    Scott’s making a very tricky long play. It such a strong one, it may in fact win our bet Nov2012, but even our bet is just a deviation about who and how he messages on his point. I think he brings about NGDPLT faster by selling the Tea Party crowd on it, he thinks otherwise.

    DeKrugman meanwhile doesn’t stand a chance.

    Meanwhile, Matty is still very much a man in flux, becoming more libertarian as the years go on. I find his transformation to be compelling, and I’m generally very happy to see a prolific lefty writer who pulls his side towards dereg – creating rifts in the party line.

    So, I’m not “anti-Matty,” about as much as I’m not “pro-Rush” but I don’t think you get that. Matty is fixing the left in ways I like. Rush wasn’t fixing the right in ways I like. (note both Breitbart and Scott are fixing the right in positive ways).

    It would make me think you don’t get nuance, but you have grasped in the past that Sumner doesn’t have much for your team (you’ve posted on it and quoted me), so maybe you should ask yourself WHY Matty hasn’t discussed this about Scott.

    Why hasn’t Matty noted that Sumner’s targeted NGDP supports small government?

    Interested in your thoughtful answer.

    —-

    On a completely separate topic, Matty pissed me off, so I’ll hack together my own little seance get it running for perpetuity and like Scott says, I’ll get over it.

    Matty will be able to turn it off anytime he wants.

    I appreciate you brushing of Jack Kennedy raping a 19 year old girl while in the White House (no big deal!) to try and argue philosophy with me (non-responsive), but this isn’t about that…

    Matty pissed me off, I am responding on pure policy terms. No philosophy is involved.

    You could discuss whether my course of action:
    1. is best at making me feel better.
    2. is best at modifying matt’s future behavior.
    3. is best at making Matt delete the post.

    But thinking I’d get into a rhetorical salad about Drew vs. Kennedy etc. etc. misses what causes change.

  48. Gravatar of Becky Hargrove Becky Hargrove
    14. March 2012 at 08:31

    In the spirit of this post, no one towards the last part was trying to use monetary policy to solve our problems!

  49. Gravatar of ssumner ssumner
    14. March 2012 at 10:28

    Becky, I wish the focus had been on monetary policy solving problems!

  50. Gravatar of Mike Sax Mike Sax
    15. March 2012 at 07:16

    I think your course of action may achieve 1 for you but that’s only because you decieve yourself that it can also precipitate 2.

    As for 3 youre all wet as there was no post. It was a tweet where he said that Breitbart’s pasing is good riddance to bad garbage. Again consdiering Breitbart’s tactics through the years I can’t feel bad about it.

    As to your more interesting Machiavellian jaunt, hey I’ve wondered the same thing.

    You think he and Brietbart are on the same team. If so then he and I are not on the same team.

    Yet Scott’s strategy according to you is that he’s co-opting the Left rather than cozying up to the Right. You are always like a little chiwuahwa at his ankles because you think he’d be better off cozying up to the Right.

    If you’re right-and I have considered it, I have not come to any final conclusion but am still aware-then you have to at least give it to him that it’s a very shrewd strategy.

    Much more subtle than what’s typical for the Right, at least the American Right. For the most part the Right is about as subtle as a traffic accident.

    You’re compalint is that he’s too subtle. You want him to play captain obvious. But that kind of work is for your Limbaughs and Breitbarts.

    If Scott is a reactionary-here I’m saying if cause at present that’s what I mean-he’;s at least unsual in his subtely and articulateness.

    Are you doing much by wanting him to be less subtle? Don’t you see that the more he cozies up to the Tea Party the less effective he would be?

    He said above that most of his readers don’t understand what he’s doing. You believe you understand. But if you’re right don’t you see that he would have a much smaller readership if most of his readers did understand?

    In that vein aren’t you hurting more than helping?

    What bet did you guys make exactly?

  51. Gravatar of Mike Sax Mike Sax
    15. March 2012 at 07:17

    Morgan the above long comment is for you of course.

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