Why the left and right now agree on monetary policy
There is a rapidly developing consensus among economists of both the left and the right that NGDP targeting is the way to go. How did this consensus develop, given their wildly different views on other important issues?
The original push for NGDP targeting seemed to come mostly from economists on the right. It was seen as a good post-monetarist policy rule. Recall that the monetarists had favored a stable rate of increase in a monetary aggregate, usually M1 or M2. The hope was that velocity would be stable. Unfortunately, fluctuations in velocity during the early 1980s seemed to discredit monetarism (although in fairness Friedman seems to have erred in focusing on M1 at the time.) So conservatives began to look for alternatives. Bennett McCallum advocated a NGDP targeting rule, where the monetary base would be adjusted to offset changes in velocity. And I think it’s fair to say that most market monetarists have vaguely libertarian leanings.
This basic approach got a lot of attention from economists like Greg Mankiw, Robert Hall, and John Taylor, although they didn’t end up in exactly the same place. Matt Yglesias linked to a Tim Lee tweet that reminds us that the late William Niskanen had NGDP targeting enshrined in the Cato Handbook for Policymakers:
The intent of Congress would be better served and monetary policy would be more effective if Congress instructed the Federal Reserve to establish a monetary policy that reflects both their concerns in a single target. The best such target, I suggest, would be the nominal final sales to domestic purchasers””the sum of nominal gross domestic product plus imports minus exports minus the change in private inventories.
[Slightly different from my version, I believe Beckworth and Woolsey prefer nominal final sales, but I am not certain.]
So how about the left? Why has Matt Yglesias, Brad DeLong, Paul Krugman, Christina Romer, et al, become interested in NGDP targeting? In my view they have recognized the advantage of NGDP targeting over inflation targeting, which in its simplest version pays no attention to unemployment. In fairness, most central banks, including the Fed, do pay some attention to unemployment. This is called flexible inflation targeting. But in the US that flexibility allows a lot of wiggle room. The Fed seems to be reluctant to focus aggressively on the growth side of their mandate, especially when all they have to work with are unconventional policy tools. As a result they have ended up not even hitting their inflation target over the past three years (on average), despite very high unemployment. No wonder the left is frustrated. NGDP targeting would make it very clear to the Fed that inflation and growth are equally important in the short run (while assuring low inflation in the long run.) So the left is on board. Indeed I’d even put Goldman Sachs into that category, if “left” means “Keynesian approach,” rather than “wild-eyed radical.”
So we have finally achieved agreement between the left and right on a critical issue to policymakers. Now we just need to convince that moderate who’s in charge of the Fed. Glad to hear that he found yesterday’s discussion “interesting.” When the left and right agree, what’s there not to like for moderates? Time for a David Brooks column?
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2. November 2011 at 18:43
Yes – David Brooks would be the right guy. Lets get this done.
And would that the ECB would do it too – because that is the only chance Europe has.
Congratulations Scott. You have made a really gigantic difference here.
2. November 2011 at 19:08
Scott
Coincidentaly I just published a post on Niskanen´s NGDPT work:
http://thefaintofheart.wordpress.com/2011/11/03/william-niskanen-a-proponent-of-ngdp-targeting/
2. November 2011 at 19:11
Scott,
I think the Left is interested in NGDP targeting as a matter of political convenience rather than a change in philosophy. They assume NGDP targeting will improve the economy and the only way Obama gets reelected is if the economy is seen as improving.
If Gore was elected in 2000 and Bush elected in 2008, I’m sure the Left would not want to see the economy improve enough to ensure his reelection.
2. November 2011 at 19:23
brian, this is WHY they won’t get it before Nov 2012.
Obama had his chance to be Clinton.
He was allowed to balance the budget and expend all his capital on a small tax increase. He was allowed to end Public Employee Unions as we know them.
Obama made his bed, and the Fed is gong to let him lie in it.
2. November 2011 at 20:57
Professor Sumner,
Would a permanent NGDP level target achieve permanent full employment. Wouldn’t it turn it into a full flat horizontal line line? Wouldnt this be greatest revolution… ever?
Continue on!
3. November 2011 at 00:42
I suspect you may soon find more commentators on the right now railing against NGDP targeting; bipartisanship on these issues tends to have a short lifespan.
3. November 2011 at 04:51
Also important for getting the left Keynesians on board, obviously, is acknowledgement that more fiscal stimulus is politically impossilble. That’s the initial motivation, anyway. I don’t doubt they see it’s value under normal conditions, too.
3. November 2011 at 04:56
The only other thing I’d say is that while it’s true that a lot of smart right-leaning and libertarian economists are in the NGDP camp, I’m fairly certain the contemporary conservative movement no longer listens to these people.
Just wait till the day Republicans find out the Fed is considering a framework that accepts 4% “inflation” (their word, not mine) and 1% RGDP.
3. November 2011 at 06:11
Scott
I believe a big factor in the increasing distrust of the Fed is the various “lending facilities” and “windows” and other powers of the Fed that have nothing to do with monetary policy but are almost certainly favorable to the Big Banks. I don’t recall you ever saying that the Fed should not be a “lender of last resort” (even Walter Bagehot wouldn’t call the current policy that), and all other auxiliary powers, and only focus on monetary policy. This would remove a lot of negativity from people’s perception of the Fed.
3. November 2011 at 07:29
Thanks JimP, All of your links have helped.
Marcus, You and I really think alike.
brian, I don’t recall the left calling for tight money when the GOP held the White House. Do you have examples?
Thanks Joe, although nothing is perfect.
David, You may be right.
Brent. You said;
“Just wait till the day Republicans find out the Fed is considering a framework that accepts 4% “inflation” (their word, not mine) and 1% RGDP.”
The Fed’s already there–it’s their dual mandate. It’s what we saw mid-2007 to mid-2008. The right didn’t complain back then. Oh yeah, Bush was President.
That’s not to say your point is wrong, I’m talking to those people you refer to, not criticizing you.
Contemplationist,
I’ve always argued the Fed should focus single-mindedly on monetary policy. I don’t even know why they need all those other tools.
3. November 2011 at 07:51
Scott, I completely agree. It’s nuts. But even aside from who is currently occupying the White House, the GOP has shifted ideologically since 2007-2008. They made Ron Paul the Monetary Policy Subcommittee.
3. November 2011 at 07:53
*made Paul the Monetary Policy Subcommittee CHAIR
3. November 2011 at 08:08
I do believe that the potential for persuation either lies on the left, or those who used to “live” on the left as I did in my twenties and thirties. Why? Many of these folks are starting to wake up to the fact that government is not really in the position of being able to help them fiscally, even when it wants to. However, the people on the right who are not already on board may be hard to persuade in the degree to which they are invested in the economic environment remaining basically as it exists now, (for instance, one would not know a recession exists in Dallas where a wait for a table in a restaurant can still take more than an hour). What’s more, this status quo position can actually be traced prior to the housing bubble, when many of the dividing lines between a lot of haves and have nots had already been established. Some of these status quo conservatives were persuaded by progressives to bridge the have/have-not divide by easing lending housing restrictions. They might feel as though it were some of the same persuation if the Fed propped up the housing market further.
3. November 2011 at 12:13
I don’t think the left vs. right in this post is very informative.
First, I agree that Mankiw has been great on this issue, but he’s really done so from the left “meaning Keynesian approach” as GS has. John Taylor has been TERRIBLE, and you’ve documented a lot of it. He’s even advocated an ECB type rule of only targeting inflation. Robert Hall has been pretty bad as well, “A serious error by Robert Hall and the JEP” by Scott Sumner :-).
Other economists one associates with the right like John Cochrane (arguably the most knowledgeable on macro issues of all the famous Booth professors) has been awful on this issue. Though this unpublished op-ed shows signs of life . He’s still fundamentally thinking about the issue in the wrong way, without enough appreciation for a rule with memory, but he gets around to something not dissimilar to a market targeting NGDP futures.
And is anyone in the Recursive Dynamic Macro that wasn’t already a New Keynesian changing at all on this issue? I’m not so sure. I’m just less able to see the right/left convergence as you’ve laid it out. Things are improving as a whole, though.
3. November 2011 at 12:24
Oops here’s the op-ed. Apparently the WSJ wouldn’t publish it.
http://faculty.chicagobooth.edu/john.cochrane/research/papers/big_stick.html
3. November 2011 at 15:11
[…] – Scott Sumner: Why the right and left now agree on monetary policy […]
4. November 2011 at 18:09
Brent, We’ll see if they’ve really shifted in 2016, when Romney runs for re-election. Will he demand Taylor implement tight money?
Becky, But at least among idealistic intellectuals there is a meeting of minds.
Charlie, I’m not talking about who’s been good on this issue, I’m talking about who would accept NGDP as a policy regime–those are two different questions.
4. November 2011 at 21:10
“Charlie, I’m not talking about who’s been good on this issue, I’m talking about who would accept NGDP as a policy regime-those are two different questions.”
Ok, maybe I can give you Hall then under that definition, but I still don’t see giving you John Taylor, since he has recently argued we should ditch the dual mandate entirely in favor of a single mandate of low inflation.
10. November 2011 at 19:48
Charlie, Yes, but that doesn’t contradict what I said.