NGDP targeting bleg, fiscalist bleg, and the failure of inflation targeting

It’s hard to find anyone who doesn’t think Britain needs more NGDP.  I’m pretty sure both Osborne and Balls (actual and shadow Chancellors) think NGDP growth was too slow in 2010:Q4, as does Bank of England Governor King.  Paul Krugman probably thinks so, as do I.  Britain needs faster NGDP growth.

And yet Britain is apparently about to tighten monetary policy, even though King probably thinks it’s a bad idea.  What’s to blame?  Inflation targeting.  This was an idea dreamed up by academic economists who have little idea how the real world works.  It was supposed to be “symmetrical,” low inflation was just as bad as high inflation.  And it was supposed to be “flexible,” taking into account transitory supply shocks.  Most of all, it was supposed to give policymakers the right signal–when the inflation targeting indices said tighten, it was time to tighten.  This led people to look to the central bank whenever they were unhappy about inflation.  But if people are unhappy about inflation, and if a county also needs faster NGDP growth, it’s almost impossible for the central bank to deliver faster NGDP growth.  Even in the US it was a struggle to get QE2 approved, and we had 9.8% unemployment, 0.6% core inflation, and only 1.2% headline inflation last fall.

We need to stop targeting inflation, and start targeting the variable that policymakers actually care about; aggregate demand, aka NGDP.

Part 2.  NGDP targeting bleg

People have asked me for a list of economists and other prominent pundits who have supported NGDP targeting.  If you have some names, please add them to the comment section.  I can recall Bennett McCallum, and I know that there are others who have mentioned the idea.  In the blogosphere we have a number of quasi-monetarists, as well as people like Matt Yglesias.  I’m not sure about Brad DeLong, but he did talk a lot about NGDP at the recent AEA meeting.  Who else?

Let’s also include people like George Selgin, who are somewhat sympathetic but prefer a slightly different target.  I recall Selgin once did a study of interwar proponents of nominal income rules, and found a bunch of prominent names (including Hayek.)  I wouldn’t even be surprised if Keynes said something good about it—at one time or another he was on every side of almost any given issue.  When I collect enough names I’ll make a list and put it in a new post.  Thanks.

Part 3:  Fiscalist bleg

OneEyedMan wins the naming contest for the bizarre new mutation of Keynesianism that has recently arisen.  But I don’t quite agree with his using the term in opposition to monetarism.  It seems to me that the post Keynesians are closer to being the opposite of monetarist—believing fiscal (not monetary) policy drives AD.  Fiscalists seem to believe that monetary stimulus can raise NGDP, but not RGDP.  They believe only fiscal stimulus can raise RGDP.  This is different from post Keynesians who don’t think monetary policy can even boost NGDP.  And also different from RBC-types who agree on the ineffectiveness of monetary stimulus, but don’t agree that fiscal stimulus boosts RGDP.

Whereas “folk Austrianism” became the de facto conventional wisdom of the right, I see signs of fiscalism becoming the left’s version of voodoo economics.  Joe Stiglitz and Robert Reich were somewhat opposed to QE2, arguing that it would create higher asset prices (which is obviously not a liquidity trap argument.)  It would be great if someone could find some other names.  I’d like to exclude people who make “reallocation” arguments against the idea of using monetary stimulus to offset dramatic and precipitous cutbacks in public sector jobs during a slump.  Even I can accept that argument to some extent.

HT:  I’d like to thank many commenters for helping to slightly reduce my immense ignorance of UK macroeconomics.  Among others, Britmouse, Ashwin, W. Peden, Left Outside, and Richard W. helped out.


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70 Responses to “NGDP targeting bleg, fiscalist bleg, and the failure of inflation targeting”

  1. Gravatar of OregonGuy OregonGuy
    20. February 2011 at 18:40

    Gosh, for a minute, I thought you were going to out yourself as a monetarist. (Which, I think, you did.)

    Currency misalignment is an important issue, which will swamp any effects of an attempted fiscal solution. Had the Keynesians and regulationists kept their hands in their collective pockets, we would have seen a rebound by now. And, living in Oregon, I want to see a quick recovery, since we in the West suffer from a two-year lag.

    Six months ago, Stiglitz was warning of what is happening today. I think that Bush 43 Treasury policy is what was/is needed. Too bad Paulson is being vindicated in this way.
    .

  2. Gravatar of Rien Huizer Rien Huizer
    20. February 2011 at 19:03

    Scott,

    Inflation targeting in the UK (like in Australia) is mainly a device that results in widely held expectations about interest rates (and via the preponderance of variable rate mortgages has immediate effects on disposable consumer income). In addition, those expectations about interest rates (in this case interest rate differentials) influence market expectations about FX (OK, FX markets are somewhat efficient). The main way to boost AD for a smallish but trade-deficient open economy like the UK with a dominant trade partner with inflexible monetary policy is to reduce its terms of trade. Central Bank market behaviour can shape expectations towards that end (the mirror image of what Australia now does, and quite successfully). The key political condition is that there is little prospect of a domestic wage-price spiral. Under the mantle of inflation targeting, may policies are possible.

  3. Gravatar of Indy Indy
    20. February 2011 at 19:22

    Well, I still say that “fiscalism” needs a modifier. You could do to them what they’ve done to you and call them “quasi-fiscalists”. Maybe you could call these post-Keynesians “Fiscal-Supremacists” or “Fiscal Maximists” or “Primacy Fiscalism”. Those modifiers tend to get the point across about their liquidity-trap beliefs that Monetarist policies are impotent and fiscal-expansion is special and solely capable of accomplishing the policy goals.

  4. Gravatar of Rogue Rogue
    20. February 2011 at 20:21

    Scott, is there a term for fiscalists who support international capital controls, and will support monetary policy if accompanied by strong macroprudential controls against asset bubbles?

  5. Gravatar of Shane Shane
    20. February 2011 at 20:48

    Bill Greider is a journalistic founding father of this trend (Krugman called him a “vulgar Keynesian”). Here’s an extensive list of people who lean in this direction in both academia (James Galbraith) and journalism (Matt Stoller), although not all people listed are fiscalists (e.g. Dean Baker, Mike Konczal): http://balkin.blogspot.com/2011/01/zero-left.html

    I think, though, that even the most technocratic Keynesians will often show hints of fiscalism because on some level it is the soul of this school of thought: if you don’t have a certain level of faith in the notion that somehow, for some reason, monetary policy is not enough, that only some level of fiscal policy can address the crisis of the animal spirits through democratic economic self-examination, then you might as well just throw in the towel and join the Sumners of the world.

  6. Gravatar of Rien Huizer Rien Huizer
    20. February 2011 at 21:57

    Scott,

    To avoid a misunderstanding I should have added that the BoE does an “Australian” talk in a situation where they should be doing the opposite. But maybe they are taking a detour? A weak pound is not exactly what Ireland needs right now and despite all the rhetoric, they are still part of Europe (although hanging on by their fingernails).

  7. Gravatar of dtoh dtoh
    20. February 2011 at 22:05

    Supercali-Fiscalisticism?

  8. Gravatar of Benjamin Cole Benjamin Cole
    20. February 2011 at 23:17

    The word “inflation” seems to drive people into illogical positions. I just met a guy on an airplane who insisted any inflation was theft of his wealth. Any inflation, he said.

    That is why I think we have to repeatedly drive home the Japan story. If you think no inflation, and some deflation, is good, then have a long look at Japan, where they have tried that policy for 20 years…and are still trying, thus ruining the country.

  9. Gravatar of Doc Merlin Doc Merlin
    20. February 2011 at 23:26

    @Benjamin Cole:
    ‘The word “inflation” seems to drive people into illogical positions. I just met a guy on an airplane who insisted any inflation was theft of his wealth. Any inflation, he said’

    Well, in a manner of speaking if he holds his wealth in dollar denominated assets then he is correct.

  10. Gravatar of Joe Joe
    20. February 2011 at 23:32

    Professor Sumner,

    Did Milton Friedman every bring up NGDP targeting? Did he know of the idea, at least?

    Joe

  11. Gravatar of inyourhouse inyourhouse
    20. February 2011 at 23:49

    @Benjamin Cole: “That is why I think we have to repeatedly drive home the Japan story. If you think no inflation, and some deflation, is good, then have a long look at Japan, where they have tried that policy for 20 years…and are still trying, thus ruining the country.”

    Japan’s real GDP per capita growth has consistently been higher than in the US over the past 2 decades. It’s low real GDP growth is due to demographic change (a shrinking labour force due to an ageing population). The difference in Japanese and American real GDP per capita growth comes down to Japan’s superior supply-side policies.

    That makes sense to me because the rate of inflation shouldn’t matter in the long run, provided it meets expectations. Having said that, Japan’s policy is not optimal. An NGDP target (with the goal of a long run stable price level) would be more stabilizing, in my opinion.

  12. Gravatar of Mike Sandifer Mike Sandifer
    21. February 2011 at 00:38

    In defense of Reich, I think he only has a bachelor’s in economics. He’s a lawyer. Lawyers seem to think they know everything.

    And Stiglitz, well…there’s no defending him, but maybe I can pity him in his struggle against dementia.

  13. Gravatar of anon anon
    21. February 2011 at 07:39

    Price level targeting may be politically more palatable than NGDP targeting. It retains the focus on “price stability” which led to the adoption of inflation rules, but has more scope for transitory deviations due to output shocks (since these can be offset later, with no long-run effect on the price level) and perhaps for symmetrical policy as well.

  14. Gravatar of W. Peden W. Peden
    21. February 2011 at 08:05

    Mike Sandifier,

    I don’t accept accusations that Stiglitz is stupid. On the one occasion I met him at a book-signing in Edinburgh, he came across as very intelligent and even quite friendly. However, he has the kind of intellectual confidence that comes with being credited for an idea that has had a huge amount of applause and gets cited endlessly by academic economists (asymmetric information) which leads him astray constantly.

    In fact, I’d almost go so far as to say that you have to be very, very smart to say so many stupid things as Stiglitz. Or at least, say them and still have a reputation.

    Doc Merlin,

    Are you saying that deflation is theft from borrowers?

  15. Gravatar of Richard Allan Richard Allan
    21. February 2011 at 10:23

    Hi Scott, I’ve just started reading this blog and it’s pretty cracking – British slang for “good” 😉

    Don’t these “fiscalists” call themselves neo-Chartalists? I’ve seen a bit of that around.

  16. Gravatar of bill woolsey bill woolsey
    21. February 2011 at 10:30

    Targeting the growth path of the price level is better than inflation targeting when there is a change in aggregate demand. It is bad when there is a shift in aggregate supply.

    Since targeting the growth path of the price level is only desirable when there is a shift in aggregate demand, it makes sense to just target aggregate demand–money expenditures.

  17. Gravatar of Morgan Warstler Morgan Warstler
    21. February 2011 at 11:33

    Richard, MMT needs stick driven through its heart. But yeah! I’d say they basically are advocating the government printing money to buy things, requiring you pay taxes with it – and I bet if pushed they’ll say borrowing money isn’t needed.

    Interesting. What else is required for DeKrugman to go MMT?

  18. Gravatar of Morgan Warstler Morgan Warstler
    21. February 2011 at 11:35

    Woot, the Intertubes has the answer:

    http://seekingalpha.com/article/215021-misunderstanding-modern-monetary-theory

  19. Gravatar of Morgan Warstler Morgan Warstler
    21. February 2011 at 11:47

    One more question… this is from Galbraith:

    “My position is that the government should focus on real problems: unemployment, care for the aging, energy, climate change, and the disaster in the Gulf of Mexico.

    The so-called long-term deficit is not a real problem. And the capital markets demonstrate every day that they agree with this judgment, by buying long-term Treasury bonds for historically-low interest rates.”

    Isn’t the response to this very simple: The capital markets rightfully expect to see The Public Unions gutted, the benefits to Seniors limited, etc.

    Meaning if the capital markets assume liberals have no real power, and are in the decline, then aren’t they rational to keep buying T-bills?

  20. Gravatar of Freshwater Freshwater
    21. February 2011 at 12:25

    Do a Wisconsin union debate post! Now I say!

  21. Gravatar of Nick Rowe Nick Rowe
    21. February 2011 at 13:31

    Scott: “Inflation targeting. This was an idea dreamed up by academic economists who have little idea how the real world works.”

    I don’t think inflation targeting was dreamed up by academic economists. It started in the central banks themselves. Academic economists only came on board when it was a fait accompli in Canada and New Zealand.

  22. Gravatar of Benjamin Cole Benjamin Cole
    21. February 2011 at 13:31

    Inyourhouse:

    This chart suggest otherwise. This chart stops in 2006, and the situation has radically worsened since then. I also posted recently here a story that wages have been falling for 20 years in Japan.

    I see total failure in Japan of tight money. It simply suffocates an economy.

    http://www.nationmaster.com/time.php?stat=eco_gdp_percap-economy-gdp-per-capita&country=ja-japan

  23. Gravatar of Nick Rowe Nick Rowe
    21. February 2011 at 13:54

    My source on the origin of inflation targeting is Chuck Freedman, retired Deputy governor Bank of Canada. Confirmed by Paul Jenkins and David Longworth, also at the Bank of Canada. Chuck says it was definitely not an import from academic economists. The Bank of Canada and the Reserve Bank of New Zealand came up with the basic framework themselves, in response to governments requests. In New Zealand, the new government wanted all government departments to have some sort of measurable performance targets. RBNZ chose inflation. In Canada, the government wanted the Bank of Canada to give some sort of guidance to help anchor expectations of inflation. The Bank of Canada responded with inflation targeting.

  24. Gravatar of Declan Trott Declan Trott
    21. February 2011 at 14:35

    NGDP bleg: Woodford’s book gives Bean’s (1983) and West’s (1986) Economic Journal articles as references (when the issue was nominal income vs monetary aggregate targeting). I believe that the later consensus was that NGDP targeting is inferior (and indeed a special case of) Taylor type rules targeting prices/inflation and real output (gaps). (They might not have been thinking about level targeting and the zero lower bound, or simplicity and transparancy at the time!)

  25. Gravatar of dtoh dtoh
    21. February 2011 at 14:47

    Benjamin,
    Japan has some serious systemic problems as well that are struggling growth.

  26. Gravatar of Bogdan Bogdan
    21. February 2011 at 15:11

    I think the Hayek pro-nominal income rule study is by Lawrence H. White. The problem is that he was was too nuanced, looked at too many things at once (because there were too many thinks to look at), never pursued a simple idea or model like MV=PQ or Y=C+I+G to its detailed logical conclusions) and he was too hesitant (he himself said that somewhere) to call for some monetary stimulus when needed. Consequently, in the public opinion/public policy of the time he was “proven” wrong. I like that study and the effort to “rescue Hayek’s reputation as a merciless laissez-faire economist”, but it loses some of Hayek’s complexity. In a bizzare way, Hayek was too complex (or muddy if you prefer) even for himself.

  27. Gravatar of Bogdan Bogdan
    21. February 2011 at 15:24

    I think the Hayek pro-nominal income rule study is by Lawrence H. White. The problem is that Hayek was too nuanced, looked at too many things at once, never pursued a simple idea or model like MV=PQ or Y=C+I+G to its logical conclusin and, as he himself admitted retrospectively, he hesitated to call for monetary stimulus when some was needed. Consequently, in the public opinion/public policy he was “proven wrong”. I like the idea of “rescuing Hayek’s reputation as a man eating laissez faire economist”, but it’s difficult to do it through one single idea, especially because know a lot has been broken in many directions. Maybe Hayek’s thinking was too complex (or muddle if you prefer) even for himself :)

  28. Gravatar of Scott Sumner Scott Sumner
    21. February 2011 at 15:52

    Oregonguy. “outed myself?”

    Rien, You said;

    “The key political condition is that there is little prospect of a domestic wage-price spiral.”

    With NGDP targeting this wouldn’t be a worry.

    Indy, Maybe, but I prefer simplicity.

    Rogue, I’m not sure–maybe Shane knows.

    Shane, You said;

    “I think, though, that even the most technocratic Keynesians will often show hints of fiscalism because on some level it is the soul of this school of thought: if you don’t have a certain level of faith in the notion that somehow, for some reason, monetary policy is not enough, that only some level of fiscal policy can address the crisis of the animal spirits through democratic economic self-examination, then you might as well just throw in the towel and join the Sumners of the world.”

    Good point. In 2006 I thought they had thrown in the towel–now I don’t know what to believe.

    Thanks for the names.

    Rien, The population of Britain is 15 times larger than Ireland, so I’m guessing Irish problems don’t factor into their decision-making.

    dtoh, I won’t be able to spell that.

    Benjamin, I wonder if he thinks deflation adds to his wealth?

    Doc Merlin, Only unexpected inflation. And no one is talking about raising the price level above the trajectory expected a few years ago.

    Joe, I don’t know.

    inyourhouse, The figures I saw suggested real Japanese GDP growth was slower in per capita terms.

    Mike, I didn’t know Reich was a lawyer. Stiglitz is brilliant, but I’ve never thought macro was his forte.

    anon, You might be right.

    W. Peden, You had the same thought about deflation as I had.

    Richard Allan, I had thought the neo-chartalists were post-Keynesians, but that might be completely wrong.

    Bill Woolsey, That’s a good point.

    Morgan, What does Galbraith think about monetary stimulus without deficits?

    Freshwater, Interestingly, it is my home town. But I’ve been away so long that it seems very foreign to me. Wisconsin has become more polarized; I assume that’s because private sector workers see those in the public sector doing much better than them, and are resentful. That wasn’t true when I lived there.

    Falling NGDP produces lots of strange side effects, I have to give Morgan credit for seeing this one coming before I did.

    I’d like to see Wisconsin adopt “socialized education.” A system of “universal education insurance for all” with a “single-payer system.” But people would be free to buy a bit more education if they wished. Some people call this system “vouchers,” which sounds kind of like “vultures.” If the NEA can accept that, fine. If not, then crush them.

    Nick, I guess you are right. But certainly academics thought up price level targeting long before central banks did (Sweden was the first–in 1931.) I would add that things like the Taylor Rule come from academia. And one can argue that central bankers are also living in a sort of ivory tower. But I don’t think economists realize how strange non-economists view the call for higher inflation in the midst of recession.

    Declan, Thanks, those are all good observations.

    Bogdan, Yes, I read the White paper, but I think there is a much earlier Selgin paper that has lots more history. If I wasn’t so sick now I’d go look for it.

  29. Gravatar of Doc Merlin Doc Merlin
    21. February 2011 at 16:11

    “bizarre new mutation of Keynesianism that has recently arisen”

    How is it new, I have been hearing it for the last decade and a half.

  30. Gravatar of Benjamin Cole Benjamin Cole
    21. February 2011 at 17:26

    DTOH:
    Of course, and every country has structural impediments of one kind or another.

    Yes, Japan has an aging population–but that should make workers more valuable, and yet wages are going down.

    And why does the yen get stronger all the time? That must reflect tight money.

    Are young people not having babies in response to economic conditions? So the demographic problem gets worse, not better with tight money.

    Why is it monetarists say “All inflations are monetary” (M. Friedman) and yet when it comes to Japanese deflation, suddenly they start talking about fiscal policy, demographics etc. Are not all deflations monetary? Why not?

    The Bank of Japan has wrecked the Nippon economy. Tight money and zero inflation simply does not work. It results in perma-recessions, decreased outlooks, very long term secular bear markets etc. Oh, maybe some day Japan asset prices will hit bottom (although another decade of deflation is expected).

    Is 30 years of deflating asset values and recession really worth the “reward’ of no inflation?

  31. Gravatar of dtoh dtoh
    21. February 2011 at 17:46

    Benjamin,
    I agree the BoJ has made things worse. I also agree most of the demographics trends are a result not a cause of the economic malaise.

    But at the same time, I think the bigger problem is that high tax rates and excessive regulation has all but strangled new business formation. (Except for cash based businesses that don’t require a lot of capital, which is why Tokyo has the best beauty salons and restaurants in the world.)

    IMO once an economy advances to a certain level, you need a fair amount of new business formation in order to sustain growth. The problem in Japan is that there is only a very weak mechanism to fund new businesses so it doesn’t matter how much money the BOJ pumps into the economy, it has little influence on new business formation, and even if there was a mechanism, taxes and regulations make it almost impossible to for business owners to make money. (On top of which, Japan has a bad habit of putting successful entrepreneurs in jail).

  32. Gravatar of StatsGuy StatsGuy
    21. February 2011 at 20:41

    @ Benjamin Cole

    “Yes, Japan has an aging population-but that should make workers more valuable, and yet wages are going down.”

    Two issues – world economy, and tyranny of the pensioners

    World Economy – to the degree foreign labor can be substituted, it’s plentiful and cheaper

    Tyranny of the Pensioners – to preserve the purchasing power of pensioners, the value of the currency must hold steady in terms of goods and services EVEN AS DOMESTIC SUPPLY (of labor, at least, due to aging and low birth rates) goes down. And industries where technology does not easily substitute for labor, output supply goes down.

    @ssumner

    Hey, here’s a crazy notion – as long as we’re shifting from inflation (level) targeting to NGDP (level) targeting, maybe we should shift pensioners from inflation adjustments to NGDP adjustments. That way, pensioners would have an inherent incentive to balance economic growth vs. loss of purchasing power. Right now, all they care about is purchasing power (until or unless a recession gets so bad that it threatens the viability of the pension systems themselves – either financially or politically – as may be happening in US states – notably, see Wisconsin).

    Say, for example, the NGDP target is 5%,and the annual COLA is equal to 2% +/- the absolute deviation of NGDP from the 5% growth target. If real growth is 5% and inflation 0%, kudos to them – parties for everyone (supply is increasing! more for everyone!). If inflation is 5% and real growth 0%, well it means there’s less of everything to go around. This automatically balances the distributional impact of fixed income by linking it to the total productivity of the nation. Example – They get a 2% nominal wage increase. If real growth is 0%, they are indifferent between 3% inflation and 5% inflation. BUT, they have incentive to seek the level of inflation that maximizes future real output trajectory subject to lower prices. The actual structure could surely be fitted better to possible outcomes, but the basic idea would help the situation we’re now in.

  33. Gravatar of Benjamin Cole Benjamin Cole
    21. February 2011 at 20:53

    DTOH-
    You raise interesting points about Japan’s financial system, and I confess I do not know their venture capital and banking set-up. It may all be very cronyish. And that would be a serious impediment to growth–although they grew like gangbusters until the 1990s.

  34. Gravatar of Morgan Warstler Morgan Warstler
    21. February 2011 at 21:00

    “Morgan, What does Galbraith think about monetary stimulus without deficits?”

    dur, huh? Is this is an essay exam?

    He apparently believes it is perfectly reasonable, but only if:

    1. You spend money like Obama would have in 2000.
    2. You never borrow any money to pay for it.
    3. And taxrape people to suck all the money you spent back out of the system.

    Two notes:

    1. I’d STILL like people’s guess what makes DeKrugam go MMT.

    2. Has anyone ever read up on Natural Money?

    http://www.naturalmoney.org/

    If I’m ever dictator – this is what I’m doing.

    Essentially, usury is outlawed. So all savings is generally invested for equity in a going concern.

    In many ways it is very much like what has been happening to investors at the zero bound. They are unable to find any risk free returns, they are unable to do capital formation.

    I imagine it like suddenly the only investment is venture capital.

    Has anyone ever heard of “The miracle of Wörgl”?

  35. Gravatar of Doc Merlin Doc Merlin
    21. February 2011 at 22:11

    @Morgan: Re: naturalmoney
    That is SOOOOO wrongheaded. banning interest just results in black market borrowing… its a terrible idea and would give huge profit opportunity to the mafia.

  36. Gravatar of Fredrik Fredrik
    21. February 2011 at 23:20

    “Yes, Japan has an aging population-but that should make workers more valuable, and yet wages are going down.”

    Why would a higher share of non-working people raise the average wage? It doesn’t make any sense at all. As if you could raise the real wage in a country by doing a “helicopter drop” of unproductive people. Sure, workers would become more “rare”, but they won’t become more productive.

    “Why is it monetarists say “All inflations are monetary” (M. Friedman) and yet when it comes to Japanese deflation, suddenly they start talking about fiscal policy, demographics etc. Are not all deflations monetary? Why not?”

    Nobody is saying that Japanase deflation is due to demographics. Only that demographics is a heavy drag on Japanese RGDP. Monetary policy cannot change this. If you don’t believe this, you have to believe somehow that Japanese workers can be significantly more productive than their European and American counterparts, simply by having older relatives. And that the key to this productivity potential is somehow monetary policy?

  37. Gravatar of JB JB
    21. February 2011 at 23:49

    I think Martin Wolf (at the FT) has supported NGDP targeting, but I’m not sure.

  38. Gravatar of 準マネタリズムご紹介Ⅰ 「名目と実質」および「期待名目GDPを押し上げる方法」 · 明æ 準マネタリズムご紹介Ⅰ 「名目と実質」および「期待名目GDPを押し上げる方法」 · 明æ
    22. February 2011 at 02:12

    […]  名目GDP目標はインフレ目標とは異なります。両者の関係について少し。何しろちょうど最新のエントリでもサムナーはいつもの調子で「英国はインフレ目標をすぐに止め、名目GDP目標に切り替えるべき」と言っています。 […]

  39. Gravatar of Richard Allan Richard Allan
    22. February 2011 at 04:30

    Morgan Warstler: “2. Has anyone ever read up on Natural Money?

    http://www.naturalmoney.org/

    If I’m ever dictator – this is what I’m doing.”

    Congratulations, you are literally Hitler. 😉

    http://loveforlife.com.au/content/10/11/19/american-social-credit-why-we-need-it-now-you-need-understand-stealth-economic-warf

  40. Gravatar of Richard Allan Richard Allan
    22. February 2011 at 04:32

    ssumner: “Richard Allan, I had thought the neo-chartalists were post-Keynesians, but that might be completely wrong.”

    Well, there’s your problem, I don’t know the difference between Post- and New-Keynesians! The closest thing to Post-K I’ve read is “Debunking Economics” by Steve Keen. I don’t read New K stuff because I’d like to avoid an aneurysm.

  41. Gravatar of Morgan Warstler Morgan Warstler
    22. February 2011 at 04:57

    @Doc Merlin,

    Can the mafia survive in a world of trackable electronic money? I think I’d do both.

    Please give this a quick read:

    http://www.globalideasbank.org/site/bank/idea.php?ideaId=904

    In this world, how does mafia survive? Everyone is employed, and the only form of wealth is active profit making concerns.

    You are thinking about the high level of illegal interest they would charge, but their cash stores are evaporating from under them. They have to make illegal loans, and they have to make them almost exclusively to the dying businesses.

    What it feels like to me, is that the only way to be economically rich, is if you own a growing businesses, and even then you are forced into a adapt or die mindset.

  42. Gravatar of anon anon
    22. February 2011 at 08:34

    Morgan Warstler, historically, banning interest does not result in mafia orgs making illegal loans. Rather, interest charges are disguised by using more complicated contracts. See the whole industry of “Islamic finance” for an example.

    Demurrage on currency is an interesting idea if you want to maintain complete stability in the price level (0% inflation) while still allowing for equilibrium rates of interest. Otherwise, the consensus is that low, stable inflation is superior. I doubt that demurrage charges on yen-denominated currency would make the Japanese much better off.

  43. Gravatar of ISLM ISLM
    22. February 2011 at 09:52

    When I collect enough names I’ll make a list and put it in a new post.

    I don’t think I would be mischaracterizing his views to include Roger Farmer on such a list. As I’ve noted before, he wants the Fed to have additional policy tools to stabilize asset prices by trading an index directly on stock markets.

    As an aside, SS, you could probably write an interesting post about your plan for NGDP futures.

  44. Gravatar of Steve Steve
    22. February 2011 at 09:54

    Scott,

    I don’t understand why VAT is included in inflation calculations. Of course at an arithmetic level, consumer prices build in VAT, so VAT increases get added to inflation, but isn’t VAT even less core than food and energy?

    Why not enact a flat tax surcharge on income, then create a special tax deduction for savings and investment (which is basically what a 401K is), then all of a sudden an equivalent tax is no longer inflation?

  45. Gravatar of Richard W Richard W
    22. February 2011 at 13:42

    JB
    21. February 2011 at 23:49

    ” I think Martin Wolf (at the FT) has supported NGDP targeting, but I’m not sure. ”

    Samuel Britain has written positively about NGDP targeting. I know Giles Wilkes who is now a government advisor and was mentioned in this article followed Prof. Sumner’s blog. I doubt whether we will see any explicit radical change in monetary policy in the immediate future. Although, the Bank may be currently implicitly targeting NGDP anyway. A new governor in 2013 could result in lots of policy changes.

    http://www.samuelbrittan.co.uk/text361_p.html

  46. Gravatar of Dtoh Dtoh
    22. February 2011 at 14:16

    Benjamin,
    The main feature is about Japan’s VC business is that it is mostly VC arms of large financial institutions with corporate bureaucrats making investment decisions rather than investors putting their own capital at risk.

    Prior to the 90’s, things were a lot simpler – just stuffing people and capital into large industries ( even the Soviets were successful doing this back in the 20’s). With an advanced and more complex economy, capital allocation becomes much more difficult.

  47. Gravatar of Belligerati » Blog Archive » Link round up Belligerati » Blog Archive » Link round up
    22. February 2011 at 15:52

    […] NGDP targeting bleg, fiscalist bleg, and the failure of inflation targeting An unusual public squabble among the three largest credit-rating firms erupted over a $280 million residential mortgage-backed security that was priced on Friday, the first private RMBS deal of the year. […]

  48. Gravatar of Scott Sumner Scott Sumner
    22. February 2011 at 20:18

    Doc Merlin, It was new to me.

    Statsguy, You said;

    “Hey, here’s a crazy notion – as long as we’re shifting from inflation (level) targeting to NGDP (level) targeting, maybe we should shift pensioners from inflation adjustments to NGDP adjustments. That way, pensioners would have an inherent incentive to balance economic growth vs. loss of purchasing power. Right now, all they care about is purchasing power (until or unless a recession gets so bad that it threatens the viability of the pension systems themselves – either financially or politically – as may be happening in US states – notably, see Wisconsin).”

    That’s a great idea.

    Morgan, You said;

    “If I’m ever dictator – this is what I’m doing.

    Essentially, usury is outlawed.”

    I believe there are a few “dictator positions” opening up in some Middle Eastern countries that don’t approve of usury.

    Seriously, you should check out Kotlikoff’s banking reform proposals. I seem to recall that they somehow turn debt into equity, but don’t recall the details.

    Fredrik, You said;

    “Why is it monetarists say “All inflations are monetary” (M. Friedman) and yet when it comes to Japanese deflation, suddenly they start talking about fiscal policy, demographics etc. Are not all deflations monetary? Why not?”

    This puzzles me, as all monetarists I know (including Friedman) said monetary policy explains the Japanese deflation.

    JB, Thanks for the info.

    ISLM, I’ve already written that post. Google “spot the flaw in NGDP futures”

    Steve, Yes, VAT should not be put into inflation indices for monetary policy purposes. Sure it raises peoples’ cost of living, but central banks need to know how much companies are receiving for the products they sell, and VAT is not revenue to companies.

    Richard, Thanks for that info.

  49. Gravatar of Morgan Warstler Morgan Warstler
    22. February 2011 at 22:22

    My gut says “everything is equity” creates as steep a technology curve, as any system can muster.

    You get cordite in the ass of money holders – which is what the inflationistas cheer for right?

    But you have none of freshly printed money being stuck into the pockets of the banksters.

    (which reminds me Scott, I have a question: Assume you find out it DOES matter who gets to the printed money first – does it change your approach to QE?)

    More specifically, the entire concept of “riskless” changes – suddenly making smart investments is far important.

    Scott insists that no one out thinks the market routinely. Well if that’s true, then we have nothing to fear from Natural Money – it’ll be even more volatile.

    I however harbor suspicions that out-thinking the market is only near impossible because Interest makes the bankers the “house.”

    And that when the boys playing banker suddenly have to play straight up poker, we’re going to see the same crowd, the entrepreneurs winning over and over and over again.

  50. Gravatar of Lorenzo from Oz Lorenzo from Oz
    22. February 2011 at 22:41

    Morgan: I keep trying to read that natural money site but it is so ignorant of economic history it makes my head hurt. Interest is the level of risk that has to be covered for credit to be offered. One cannot abolish risk, one can merely degrade the ability to price it and so deal with it more effectively.

    If I was to nominate a single reason why the Western economic take-off occurred, I would nominate capital markets. Capital markets meant ideas could be operationalised. To take one example which made so much of a difference (we live in the Renaissance that never ended because of it) the printing press operated very differently in Europe than it did in China because of capital markets.

    To be sure, those capital markets were embedded in property rights and competitive jurisdictions that allowed them to operate, but their operation then had effects back on the operation of property rights and competitive jurisdictions. And yes, debt was misused. Sovereign monarchs could be even worse than the duly elected represented of sovereign peoples at mishandling the taxpayer-guarantee — Philip II of Spain was paying incredible interest rates at one stage due to previous Habsburg bankruptcies. But, even given all that, the operation of capital markets was an incredible advantage to Europe and its offshoots. Some financial instability is a small price to pay, just as the business cycle pales compared to the long run trend of higher incomes and higher life expectancies.

    The Aristotelian argument, in all its offshoots, against interest rates is natural law bunkum. Risk is a real factor in economic affairs: in many ways, the most important factor, as assessment of risk is so central to economic actions in so many ways. Being able to price it properly, and in diverse ways, is an enormous advantage. The problem in recent times is not interest rates, it is action which badly distorts risk assessments and incentives. The economy will not work better if one closes down such a basic information channel: that is massively magnifying the problem, not creating any sort of solution.

  51. Gravatar of Morgan Warstler Morgan Warstler
    22. February 2011 at 22:49

    One more thing from DeKrugman:

    “It’s a constant battle to get people to understand that higher productivity is not the answer to inadequate demand, that greater wage flexibility may be good at limiting structural unemployment but may actually make things worse when you’re facing massive cyclical unemployment, and so on.”

    That is the high water mark. Let it be known!

    February 21, 2011, 9:15 AM EST shall stand time as the exact moment, the perfect snapshot, that the 2008 Nobel Prize winner for Economics went FULL RETARD:

    http://www.funnyordie.com/videos/bce7b31cef/tropic-thunder-film-clip-nobody-goes-full-retard-from-ilike2party

    He’ll never recover. We’re past his expiration date. He’s now asserting that legitimate capital savings and lower prices do not increase demand.

    Reducing structural unemployment is WORTHLESS when facing massive cyclical unemployment.

    ——

    It is clear that DeKrugman JUST FIGURED OUT what the final rebuttals explain, and he’s now frantically carving out a very small piece of land to try and hold and defend before (what he hopes is) a very sympathetic judge:

    The old economy is going to come roaring back! This is all cyclical! And cramming down labor rates to put more people to work competing against China is shortsighted!

    Ok, so the logical question then is: DeKrugam HOW LONG does unemployment have to be cyclical, before it becomes structural?

    And if your opposition knows about about this, and you know they know, and you know they’ll hold out – then shouldn’t we just call it structural now and be done with it?

  52. Gravatar of Morgan Warstler Morgan Warstler
    22. February 2011 at 23:08

    Lorenzo, imagine a man sits on a pile of money, and 20 different men are saying “invest in MY THING!”

    In the current model, he is uninterested. Yawn! He says.

    He simple says, let me see your collateral.

    And once he sees it, risk is simply about how much can he sell your collateral for?

    In many ways a banker is just a pawn shop, he’s got to have a good eye for what shit is worth.

    And thus we have fractional banking. Say whatever you want – collateral is the real fuel of banking. You need it to buy in at the poker table.

    —-

    Now imagine, there is NO collateral. We have this right now. Everyday. It’s called Venture Capital. So we know a lot about how it works.

    So instead he sits on a pile of money, and it is slowly burning up under him. Just a smolder really, but the smoke gets in his eyes, and make it hard for him to think.

    And NOW he’s still assessing risk, but his skill set is far more rewarded for assessing new ideas, new technology…

    If he’s to be a boring “banker” all he really is someone who BUYS your collateral when you need $ for your next idea.

    His returns are much smaller, so now he’s just an equity investor – he’s a VC, suddenly everyone is thinking about uncapping new markets, because old performing assets (without new visions) already have their equity sold off and they are paying out dividends, and the owners are staring at their new pile of money.

    All I know is – the kind of guys I really like – seem to become kings in this model. And the guys I despise, they get chewed up and run under.

    I’m sure theres a glaring error, and I’m not an economist, but I think I have good gut instincts – so at least so far it’s been the most compelling non-Austrian thing I’ve ever heard.

  53. Gravatar of anon anon
    23. February 2011 at 03:37

    “So instead he sits on a pile of money, and it is slowly burning up under him. Just a smolder really, but the smoke gets in his eyes, and make it hard for him to think.”

    I don’t get this. If I hold currency, I’m going to lose about 2%/yr in real terms, regardless of whether it’s inflated away or demurrage based. So of course I’m going to hold other assets, which will fund loans or investment at varying levels of risk. Even currency is a real loan to the government at 0% nominal interest–and holding gold is investing in a stock of exhaustible resources.

    VC credit is not expensive because it lacks collateral– it’s expensive because risk is very high (and it’s hard to securitize due to information and incentive problems). Are _you_ going to invest your retirement savings in the latest Silicon Valley startup, which is most likely going to fail and yield a -100% return?

  54. Gravatar of Scott Sumner Scott Sumner
    23. February 2011 at 18:43

    Morgan, You asked;

    “(which reminds me Scott, I have a question: Assume you find out it DOES matter who gets to the printed money first – does it change your approach to QE?)”

    In that case I retire, as everything in this blog would have been wrong.

  55. Gravatar of Dtoh Dtoh
    23. February 2011 at 19:13

    Scott, Morgan
    What do you mean by who gets the money first?

  56. Gravatar of Morgan Warstler Morgan Warstler
    23. February 2011 at 19:31

    Scott, that’s why you rock.

    Dtoh, the thing that pisses me off to no end is that the Fed goes out and buys the Treasuries in the open market, apparently from the Goldman Sachs, but more generally in a way that sounds very much like the Navy buying toilet seats.

    This then gets dumped into reserves, not lent out.

    Scott’s argument is that it has an affect none the less – because whoever else would have bought the Treasury, and one assumes more intelligently paid less for it- they still have the cash and have to do something else with it.

    That’s as far as I have pulled it from Scott, as far as he goes on the actual mechanics of “how.”

    —–

    This is why I like Cochrane’s spin on Scott’s original idea – that we should have a Futures Market betting on NGDP/CPI.

    So that when someone bets on there being not enough inflation – the newly printed money goes into their pocket first.

  57. Gravatar of Mark A. Sadowski Mark A. Sadowski
    24. February 2011 at 06:58

    @Steve and Scott,
    Thanks to Rebecca Wilder I was alerted this morning to the fact that Eurostat has a “Harmonized Index of Consumer Prices (HICP) at constant tax rates”. (I probably should have known this but the amount I don’t know constantly amazes me.) I looked up the figures for the UK and here is what I found.

    The HICP was up 3.2% yoy in November. The core HICP was up 2.5% yoy in November. The HICP at constant tax rates was up 1.5% yoy in November. There is no “core HICP at constant tax rates”, but simple subtraction suggests that if there were one, it would be up by 0.8% yoy in November. Which means all the hysteria about inflation in the UK is a lot of nonsense.

    Now I think we all agree price level targeting is superior to inflation targeting, and that NGDP level targeting is better still. But if you are going to target inflation rates than you should at least be targeting a measure of “inflation inertia”. The headline HICP in the UK is seriously skewed by the volatile energy and food component and the two VAT increases. Using the correct measure of inflation inertia, the real danger in the UK right now is deflation, not inflation.

  58. Gravatar of Richard Allan Richard Allan
    24. February 2011 at 07:58

    What’s the difference between price level targeting and inflation targeting? If it’s the “obvious” answer (the former tries to unwind inflationary “shocks”, the latter considers them part of the forgotten past and targets inflation going forward), I would have thought the latter was closer to NGDP than the former.

  59. Gravatar of dtoh dtoh
    24. February 2011 at 08:09

    Morgan,
    You replied.
    “This then gets dumped into reserves, not lent out.

    Scott’s argument is that it has an affect none the less – because whoever else would have bought the Treasury, and one assumes more intelligently paid less for it- they still have the cash and have to do something else with it.

    That’s as far as I have pulled it from Scott, as far as he goes on the actual mechanics of “how.”

    I have been going back and forth with Scott in separate older post on this same subject.

    My view on this is that rather than just going back in as Fed deposits, the banks use some of the cash to turn around and induce corporations/individuals to sell bonds and take cash. I would argue however, that this does not impact spending (AD). For corporations and individuals, unless there is some pre-existing need for cash, simply inducing a switch in assets from bonds to cash (by raising the price for bonds) will have almost no impact on spending (and thus AD).

    The mechanism by which asset purchases by the FED does have an impact on AD by is raising prices (reducing yields) on bonds and therefore inducing banks to increase other forms of credit. It is this credit expansion mechanism which has an impact on AD.

    My argument has been that this mechanism is weak and creates a lot of political push-back (because the FED is buying government debt and facilitating government borrowing) and therefore it would be much more effective and politically feasible to switch to a monetary policy which is based on the Fed setting manipulating capital reserve ratios for the banks.

  60. Gravatar of anon anon
    24. February 2011 at 08:33

    “My argument has been that this mechanism is weak and creates a lot of political push-back (because the FED is buying government debt and facilitating government borrowing)”

    What is wrong with the Fed buying government debt? If the government needs to borrow more than it otherwise would (in order to support Fed policy), it can offset the added borrowing by paying off some of its accrued debt, or (failing that) starting a sovereign wealth fund.

  61. Gravatar of Mark A. Sadowski Mark A. Sadowski
    24. February 2011 at 10:03

    Richard Allan,
    What Scott is advocating (and what other similar proposals have advocated) is NGDP *level* targeting. In other words targeting NGDP in such a way that it actually takes the past trend in NGDP into account when conducting monetary policy. Price level targeting, contrary to what many people believe, would actually bring less variability in prices compared to inflation rate targeting. This is especially easy to imagine if one considers the “drift” that a “memoryless” strategy can lead to over time (much like we have now).

  62. Gravatar of Richard Allan Richard Allan
    24. February 2011 at 14:54

    Mark, thanks for the clarification. I was kind of thinking that level targeting might cause you to “lock in” some deflationary pressures that you wouldn’t otherwise, though. Like if NGDP growth was above trend and decisions were made on expectations that that would continue, but you made policy based on returning NGDP to trend.

  63. Gravatar of Scott Sumner Scott Sumner
    24. February 2011 at 18:19

    Morgan (and dtoh) I think Morgan is too suspicious of the Fed. They pretty much pay market prices for that debt, it’s nothing like military procurement. Maybe GS makes a few dollars on commissions, but that’s not going to have a big macro effect.

    Mark, Your comment raises a very good point, which I should do a post on. There are lots of different inflation indicators, all giving wildly different readings. There is basically just one NGDP, although I suppose some people favor final sales.

    Richard, Both price level and NGDP targeting can be done in levels or rates of change. The levels targeting has a memory, and is better when there are demand shocks.

    dtoh, Giving people more cash has an effect on AD if and only if they didn’t want more cash before you gave it to them. The attempt to get rid of excess cash drives up AD.

  64. Gravatar of Dtoh Dtoh
    24. February 2011 at 21:15

    Scott,
    Sorry, this is counterintuitive to me. If I couldn’t get credit before because it was unavailable or too expensive, and I can now get it because credit becomes available, I will spend the cash and drive up AD. If I don’t need cash, I’m not likely to convert other assets into cash just because the Fed pushed down yields on T-bills by a couple of basis points, and even if I do convert some Treasuries into cash, I’m not going to spend it.

    If I’m a bank however and the Fed reduces the return I’m earning on Treasuries, then I’m going to sell some Treasuries and acquire other assets instead like coorporate or consumer loans.

    This is them only mechanism by which I can see asset sales by the Fed impacting AD, other than some wealth effect if reduced Tsy yields push up equity prices.

  65. Gravatar of Mark A. Sadowski Mark A. Sadowski
    24. February 2011 at 21:38

    Scott wrote:
    “Mark, Your comment raises a very good point, which I should do a post on. There are lots of different inflation indicators, all giving wildly different readings. There is basically just one NGDP, although I suppose some people favor final sales.”

    If you do a post on this you should give me at least a little credit. It would be nice for once just to get a little recognition.

    And a mention of the different measures of output wouldn’t kill you either. I personally like FSDP even though you don’t. But you owe some of your best fans a detailed explanation of why you hate our preferred measure.

    I know I sound bitchy, and I am. I had a hard week and I’m tired of being used.

  66. Gravatar of Scott Sumner Scott Sumner
    26. February 2011 at 11:20

    Dtoh, You said;

    “If I don’t need cash, I’m not likely to convert other assets into cash just because the Fed pushed down yields on T-bills by a couple of basis points, and even if I do convert some Treasuries into cash, I’m not going to spend it.”

    You are missing the point. The whole point of monetary policy is that the Fed can force people to accept cash they don’t want to hold. As individuals they can try (and succeed) to get rid of it. As a group they can’t. It’s the fallacy of composition. The attempt to get rid of it drives up AD.

    You might want to google my post entitled “A short course on monetary economics”

    Mark, Why don’t you write up a post on the problem of too many inflation measures, and I’ll post it. Be sure to mention Britain, where the problem is currently acute.

    I like NGDP because it seems more correlated with jobs, which I what I am trying to stabilize. But under forecast targeting I can’t see much difference, as divergences between the various indicators are mostly unforecastable.

  67. Gravatar of Mark A. Sadowski Mark A. Sadowski
    26. February 2011 at 18:58

    Scott wrote:
    “Mark, Why don’t you write up a post on the problem of too many inflation measures, and I’ll post it. Be sure to mention Britain, where the problem is currently acute”

    I won’t promise to do it. But if I do do it it will be for you, you dirty SOB.

  68. Gravatar of TheMoneyIllusion » Inflation targeting is a very bad idea TheMoneyIllusion » Inflation targeting is a very bad idea
    27. February 2011 at 10:53

    […] Mark Sadowski triggered an interesting discussion in a previous thread with the following comment about the UK: The HICP was up 3.2% yoy in November. The core HICP was up 2.5% yoy in November. The HICP at constant tax rates was up 1.5% yoy in November. There is no “core HICP at constant tax rates”, but simple subtraction suggests that if there were one, it would be up by 0.8% yoy in November. Which means all the hysteria about inflation in the UK is a lot of nonsense. […]

  69. Gravatar of インフレターゲットは有害だ by Scott Sumner – 道草 インフレターゲットは有害だ by Scott Sumner – 道草
    27. February 2011 at 22:32

    […] ひとつ前のポストのコメント欄でMark Sadowskiが英国について面白い話題を振ってくれた。 11月、HICPは3.2%に、コアHICPは2.5%に上昇した。税率が一定であると想定して算出されるHICP(訳注:”HICP-CT”と呼ばれる比較的新しい公式統計)は1.5%の上昇だった。これに相当するコアHICPの数字はないが、単純に引き算すれば0.8%だったということになる。つまり、英国のインフレヒステリーはほとんどナンセンスかもしれない。 […]

  70. Gravatar of Grant Grant
    25. June 2011 at 12:45

    For economists making case for a demand rule, see following articles cited in A TEST OF THE DEMAND RULE by William A. Niskanen, Cato Journal, Vol. 21, No. 2 (Fall 2001):
    Gordon, R. (1985) “The Conduct of Domestic Monetary Policy.” In A. Ando et al. (eds.) Monetary Policy in Our Times, 45-81. Cambridge, Mass.: MIT Press.
    Hall, R. (1981) “Lowering Inflation and Stimulating Economic Growth.” In A.J. Meltsner (ed.) Politics and the Oval Office: Toward Presidential Governance, 207-27. San Francisco: Institute for Contemporary Studies.
    McCallum, B.T. (1984) “Current Perspectives on Monetary Policy.” Cato Journal 6: 641-62.
    Niskanen, W.A. (1992) “Political Guidance on Monetary Policy.” Cato Journal 12: 281-86.

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