I have a new post on the Hypermind NGDP prediction market, over at Econlog.  I argue that it might be best if the market fails.

Even so, I’m encouraging people to participate.  The prize money for each contract is over $36,000, and it costs nothing to participate.  Where else in life can you win money with no risk of losing?

Only 321 people have participated in the first contract, which ends in April, and even fewer in the second, which ends at the end of April 2019.  At that rate, the average amount of winnings per participant will exceed $110.

I’d also encourage journalists to pay more attention to this market.  What other data point better describes the expected growth in aggregate demand over the next year?  Be specific.

I say yes.

Commenter BC tried to explain why it might be rational for some people to be hawks and others end up being doves:

I think of the dove and hawk designations as denoting the bias or errors that one makes in implementing discretionary policy. Doves tend to underestimate the likelihood that low inflation is “transitory” and overestimate the likelihood that high inflation is transitory and thus tend to overestimate the amount of stimulus needed when inflation is low and underestimate the amount of contractionary policy needed when inflation is high. Vice versa for hawks. One can also think in terms of expected future inflation, which is unobservable. Doves’ inflation expectations are persistently lower than hawks’ expectations. Thus, under the same current conditions, doves tend to advocate more stimulus than hawks.

While I concede this explanation might be true, I believe it quite unlikely.  If the dispute were merely a technical disagreement about how to forecast inflation, then hawkishness and dovishness would be 100% uncorrelated with political ideology.  But that’s clearly not the case.  Being hawkish is strongly correlated with being right of center, and dovishness is correlated with being left of center.  That tells me that hawks and doves are simply confused.

Elsewhere I’ve argued that in a world of 2% inflation targets it no longer makes any sense to be a hawk or a dove.  At one time those two terms did have a coherent meaning; hawks preferred a lower inflation rate than doves.  There was no inflation target at that time.  So in 1976, hawks and doves might have disagreed about setting the fed funds target at 7%, even as they agreed that this setting would likely lead to 6.2% inflation.  I believe these two groups continue to exist because they wrongly think we still live in a world where this disagreement has meaning.

We can have a world were the inflation rate is always exactly 2%.  Or we can have a policy that tries to push inflation above 2% during some periods and below 2% during other periods (my preference).  Hawkishness and dovishness have absolutely no role to play in either of those worlds.  Some doves seem to think it’s always possible to have an inflation rate that’s higher than expected, that is, policy can be consistently “expansionary”.  Some hawks wrongly believe the opposite outcome is possible.  They are simply confused.

Hawks were right that policy was too expansionary during the Great Inflation.  But they were wrong about policy during the Great Recession.  It’s wrong to be a hawk for the simple reason that it’s wrong to always favor a more contractionary policy.  That’s like always favoring turning the steering wheel in one direction.

Doves were right that policy was too tight during the Great Recession, but they are in danger of overstaying their welcome and continuing to advocate monetary stimulus at all times.  It makes no sense to always favor an expansionary policy, as we now know that expansionary policies are stimulative only to the extent to which policy is more expansionary than expected.

People should not be either hawks or doves; they should favor easier or tighter money based on whether AD is too low or too high to hit the central bank’s target.

That does not mean we can’t have ideological debates about the proper target of monetary policy.  We can and should have those debates.  (I favor NGDPLT, at roughly 4%).  But if three of the four people in the car have voted to go to Las Vegas, the fact that the driver prefers Taos is completely irrelevant.  The driver needs to steer the car towards Las Vegas.  (The driver can demand the four go see Penn and Teller instead of Britney Spears, as compensation for losing out on Taos.)

Here’s Trump:

So many signs that the Florida shooter was mentally disturbed, even expelled from school for bad and erratic behavior. Neighbors and classmates knew he was a big problem. Must always report such instances to authorities, again and again!

Again and again?  So it’s not enough to report him to authorities once, you need to do it twice?  OK, whatever Trump says.  Here’s what happens when people take his advice:

The F.B.I. received a tip last month from someone close to Nikolas Cruz that he owned a gun and had talked of committing a school shooting, the bureau revealed Friday, but it acknowledged that it had failed to investigate.

The tipster, who called an F.B.I. hotline on Jan. 5, told the bureau that Mr. Cruz had a “desire to kill people, erratic behavior and disturbing social media posts,” the F.B.I. said.

The information should have been assessed and forwarded to the Miami F.B.I. field office, the bureau said. But that never happened. On Wednesday, Mr. Cruz, 19, killed 17 students and teachers at his former high school in Parkland, Fla., law enforcement officials said.

The tip about Mr. Cruz appeared to be the second in four months, after another person told the bureau about online comments from Mr. Cruz that he wanted to become “a professional school shooter.”

It’s not so much any single comment, it’s that there are hundreds of such comments.  On his best day in office, Trump says things that are more idiotic that the sort of silly things Obama said on his worst day in office.  Not once, but again and again and again.  Someone needs to report his erratic behavior to the authorities.

This is a sort of follow-up to my previous post.  One can think of demand stimulus as policies that boost NGDP.  (There are of course other policies that boost RGDP, such as supply side reforms, which work even if NGDP doesn’t rise.  But demand stimulus boosts NGDP.)

We know from long run money neutrality that the long run trend rate of growth doesn’t matter, except for second order effects like hysteresis and menu costs and taxation of capital income—and these second order effects might be positive or negative.  If someone argues that a certain policy may be able to significantly raise the trend line for RGDP, they may be right, but they are almost certainly NOT talking about demand-side stimulus.

The upshot of all of this is that there is only one coherent way to think about demand-side policies.  When should AD be more expansionary than average and when should it be less expansionary than average? It’s incoherent to say, “I think demand side polices should always be stimulative.”  That doesn’t even mean anything.  It’s like saying, “I believe all Americans should earn above average incomes.”  Any demand-side strategy should either call for stable AD growth, or else specify when aggregate demand should be more expansionary than average and when it should be more contractionary than average.

If you are advocating demand stimulus during a period of low unemployment, then (whether you know this or not) you are implicitly suggesting that demand-side policy should be more contractionary than average during a recession.  Not good.

A corollary of this is that terms like ‘hawks’ and ‘doves’ don’t have the meaning that almost everyone thinks they have.  If you have a 2% inflation target, exactly how do you implement a “dovish” policy?  A “hawkish” policy?

What if we turn to fiscal policy; does that change things?  Not at all.  The government’s national debt is constrained by the fact that the debt must be serviced in the long run.  This budget constraint means that budget deficits that are larger than average during certain periods must be offset by deficits that are smaller than average during other periods–to keep the debt manageable.  It makes no sense for someone to say, “I generally favor a more expansionary fiscal policy than what is favored by Sumner.”  It’s not even a coherent statement.  If you say that you favor a more expansionary fiscal policy that what I currently favor, you are implicitly saying, “and at some future date I prefer a more contractionary fiscal policy than what Sumner will favor at that point in time.”  I worry that the insights of Robert Lucas are being forgotten.

In a recent Bloomberg debate, there was an interesting exchange.  First, Tyler Cowen:

But Noah, I have a question for you. You’ve written several columns about how the American economy is becoming more monopolistic. If true (and it is not exactly my view), that implies output could be much higher with current resources, even at full employment. A boost in demand could spur firms to produce more, rather than restricting output so much. So are you now a fan of these Trumpian deficits? They may not be your preferred form of deficit spending, but do you see them still as a net positive?

Then Noah Smith:

As you say, monopoly power could potentially increase the case for stimulus in bad times.

Actually, that’s not what Tyler said, nor is what Tyler said true.  (Now everyone will be annoyed at me.)

One of the fundamental principles of modern macro is that demand-side stimulus cannot solve real problems.  It can overcome problems such as high unemployment caused by sticky wages and prices combined with inadequate spending, but that’s all it can do.  Inefficiencies associated with monopoly are a real problem, and cannot be solved by printing money.  There are actually a number of issues here that need to be disentangled, some of which are quite subtle.

1.   Monopoly is a microeconomic problem, not a macroeconomic problem.  Thus it’s quite possible to have low unemployment rates and high levels of monopolization.  Indeed, I’d argue that’s true in America right now.  Employment in the monopolistic sector is indeed lower than we’d like, but the result of this is not unemployment, it’s workers being employed in the less efficient competitive sector of the economy.  This is important, because the mechanism by which demand stimulus creates growth is by encouraging more employment (not moving workers between sectors).  But we are already at full employment.

2.  Suppose I’m wrong, and monopolization causes the natural rate of unemployment to be higher than otherwise. Say America’s natural unemployment rate rises to French levels, due to monopolization.  Is Tyler correct in that case?  No, demand stimulus is still not called for even if monopolization causes the natural rate of unemployment to be higher than otherwise.  That’s because when you are at the natural rate, demand stimulus basically tricks workers and firms into producing more output than they’d like, by pushing up nominal spending in the face of sticky wages and prices.

So doesn’t that make us better off?  In the short run yes, but only at the cost of being worse off in the long run.  When prices are sticky, demand stimulus can reduce a monopoly’s real price, which is its price relative to NGDP.  But once the monopoly catches on to the higher NGDP, it will raise the real price again.  That might not sound so bad, but it leads to cyclical instability.  Ditto for wage stickiness.  Demand stimulus will give monopolies an incentive to hire more workers, as long as nominal wages are sticky.  That will indeed make the economy more efficient for a short time (this may have been Tyler’s intuition), but at a cost of future instability.

This is why we have independent central banks.  Because our economy is riddled with inefficient policies such as minimum wage laws and taxes on labor, our natural rate of output is suboptimal.  Demand stimulus tricks us into producing more, and we move closer to the optimal position for the economy.  But it’s not sustainable. It’s a sugar rush.  Minimum wages eventually get increased with NGDP, and workers renegotiate contracts.  In the short run, the stimulus really does make us better off as a country (with or without monopoly), but it overheats the economy and leads to a painful recession in future years.  Once mainstream monetarist and New Keynesian economists understood this problem, they decided the best we could do was to keep the economy close to the natural rate of unemployment, and then advocated setting up independent central banks that would be immune from pressure by a corrupt future president that might have a big ego and a short attention span.  (Hmmm . . . . )

Unless I’m mistaken, there is nothing particularly controversial about this post.  Think about a standard NK model, which produces an optimal policy of 2% inflation.  How would the existence of monopoly change the optimal policy?  Make it more expansionary?  But what does that even mean?  In the standard model, money is neutral in the long run.  Going to 3% inflation doesn’t have any long run benefit.  I suppose you could advocate steadily rising inflation, ending up in hyperinflation, but that won’t work if there are any welfare costs of inflation.  In fact, the optimal policy under a NK model is no more expansionary with monopoly than without.

Now I suppose there might be models where the optimal policy is more countercyclical if there is monopoly, and this seems to be what Noah is hinting at.  But that doesn’t help Tyler’s argument, as in that case policy should actually be more contractionary when unemployment is 4.1%.  And I’m not even sure that claim is true; do NK models imply that more weight should be put on output, and lesson inflation, when the economy is more monopolistic? Are there any models that do so?

PS.  Tyler might argue that the monopoly argument was not his view, just the implication of Keynesian models with which he does not agree.  But I’m saying even that’s not true.  The argument he makes is not even an implication of any sound Keynesian model that I’m aware of.

PPS.  I have a new post criticizing proposals to “experiment” with a hot economy, over at Econlog.