One down, eleven to go

From Matt O’Brien at The Atlantic:

Chicago Federal Reserve president Charles Evans doesn’t look the part of a heretic. But in the cozy, conservative club that is central banking, he certainly qualifies. While most of his colleagues at the Fed have recently taken an even more hawkish turn, Evans remains a champion of additional monetary stimulus. And on Tuesday he took an even bigger step: He became the first sitting Fed member to endorse nominal GDP (NGDP) level targeting.

.   .   .

A PARADIGM SHIFT?

The Fed is still a long way off, if ever, from adopting an NGDP level target. But Evans’ endorsement of the idea is a big first step in what could be a hugely important paradigm shift. Even if there isn’t a large difference between the quasi-NGDP level target that is the Evans Rule and an actual NGDP level target, it’s a fairly radical new way of framing policy. Rather than the central bank letting the economy recover faster, it puts the onus for a faster recovery on the central bank.

Most incredible is how quickly the idea is gaining acceptance. It’s true that writers like The Atlantic’s own Clive Crook have long advocated the merits of NGDP targeting. But as recently as 2009, it was mostly just a few lonely bloggers like Scott Sumner and David Beckworth who picked up the torch. Then Goldman Sachs chief economist Jan Hatzius and Paul Krugman said they were willing to give it a try. Now, a sitting Fed president is on board.

At this rate, it might not be long until we describe Evans as an orthodox central banker. Now that would be progress.

HT:  John Bennett and Marcus Nunes.

PS.  I’m way behind on comments, but will start to catch up today.


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54 Responses to “One down, eleven to go”

  1. Gravatar of Frederic Mari Frederic Mari
    2. May 2012 at 05:50

    CONGRATS!

    Seriously. I am mostly with the OP, that “there isn’t a large difference between the quasi-NGDP level target that is the Evans Rule and an actual NGDP level target” but it’s such an incredible thing, to be able to influence actual policy without being a policymaker (or a billionaire).

    So well done. I hope we get more people like you advocating their ideas and theories and convincing people the old fashion way – by reasoned debate!

  2. Gravatar of DanC DanC
    2. May 2012 at 06:06

    If you were writing a textbook how would you describe the nuts and bolts of NGDP targeting?

  3. Gravatar of Vivian Darkbloom Vivian Darkbloom
    2. May 2012 at 06:18

    “One Down, Eleven to Go”?

    Such a short phrase and yet overly and underly optimistic in one go. There are currently only 10 voting members of the FOMC. Charles Evans is an alternate member. He will presumably become a voting member in 2013. So, if you consider him, an alternate, “one down”, there would be more than 11 to go, counting all alternates. On the other hand, the change would require, I think, only a majority of the voting 10. And, although this would be a long shot, it takes only 7 voting members to constitute a quorum.

  4. Gravatar of Benjamin Cole Benjamin Cole
    2. May 2012 at 06:55

    A few months back. I e-mailed a favorable comment to Evans, through his PR contact at the Chicago Fed. I advise all others to do the same.

  5. Gravatar of Anon1 Anon1
    2. May 2012 at 06:58

    And to think your influence did not require publishing “rigorous” analysis in the AEA, JPE, JME or some other top journal. Those folks who still measure worth by counting how many publications one has in these journals should take notice.

  6. Gravatar of Morgan Warstler Morgan Warstler
    2. May 2012 at 07:03

    The Atlantic gets it wrong:

    “By early 1934, inflation was running at over five-percent a year. But unemployment was still only slowly coming down from its peak of 25 percent. An inflation-targeting central bank might look at this picture and surmise that it was time to raise rates — even if it had a dual mandate like the Fed. That would be madness. Unfortunately, this isn’t some strawman. It’s precisely what Richmond Fed president Jeffrey Lacker said the Fed might have to do in the next few years: hike interest rates despite still too-high unemployment. Lacker is an outlier on the FOMC, but the committee’s most recent minutes showed a bias towards increased hawkishness. Such a scenario is sadly plausible.”

    Under NGDPLT, and repeatedly supported by Sumner, if inflation is 5% under a 4.5% NGDPLT rule….

    There is NO accommodation REGARDLESS OF UNEMPLOYMENT.

  7. Gravatar of Saturos Saturos
    2. May 2012 at 07:11

    “Even if there isn’t a large difference between the quasi-NGDP level target that is the Evans Rule and an actual NGDP level target,”

    Of course, he’s wrong. There is a tremendous difference.

  8. Gravatar of Saturos Saturos
    2. May 2012 at 07:26

    Morgan, under level targeting, inflation and NGDP growth can temporarily exceed trend growth.

  9. Gravatar of dwb dwb
    2. May 2012 at 07:27

    excellent work.

    I thought Evans gave a thoughtful defense.

    My take on the Fisher interview is that he is mainly concerned with fiscal policy, and opposes QE because it lowers borrowing costs for the govt (he actually said he did not think inflation was an issue).

    I wish the fiscal hawks like Fisher would wake up and realize it forces the govt to “live within its means.”

    As long as only “doves” support it, it will be seen as a secret backdoor plot to get a higher inflation target. Not true, of course, but with Krugman running around saying it gives them ammo.

    incidentally, you must be getting a LOT of traffic these days cause i am getting “internal server error” on your page a lot.

    http://www.bloomberg.com/news/2012-04-30/fed-s-fisher-says-monetary-policy-alone-can-t-solve-jobs-problem.html

  10. Gravatar of dwb dwb
    2. May 2012 at 07:43

    A few months back. I e-mailed a favorable comment to Evans, through his PR contact at the Chicago Fed. I advise all others to do the same.

    honestly, i think its the hawks that need to be sold. you know the saying: only nixon could go to china.

  11. Gravatar of Frederic Mari Frederic Mari
    2. May 2012 at 07:54

    Saturos,

    Just affirming something without backing it up doesn’t make for a good debate…

  12. Gravatar of Negation of Ideology Negation of Ideology
    2. May 2012 at 07:57

    Congratulations Scott – this is a big win, much to your credit. It seems fitting that it would start in Chicago, of course.

    I second what a lot of people are saying – that what we really need are the hawks. NGDP level targeting can be framed as an inflation fighting measure to those who fear future inflation. If Romney decided to embrace it, I suspect that’s how he’d do it.

  13. Gravatar of Don Geddis Don Geddis
    2. May 2012 at 08:10

    Congratulations to Sumner. What incredible progress you have made these last few years. From the state of mainstream macroeconomics when you started blogging, and the apparent influence you had at the time, to this kind of change at the highest levels, is simply astounding.

  14. Gravatar of Morgan Warstler Morgan Warstler
    2. May 2012 at 08:16

    Negation of Ideology,

    from your lips to god’s ears.

    DWB,

    from your lips to god’s ears.

    You think Scott will finally wake up and sell NGDPLT to conservatives, he’s got the liberal ON BOARD already.

    Saturos,

    That’s not exactly true.

    The moment NGDPLT exceeds trend line, next month rates go up, and if NGDPLT exceeds it again, next month rates go up…

    This is a SEA CHANGE (it has all kinds of new positive effects), and makes Matt O’Brien 100% WRONG.

    I’m telling you, he’s a liberal who doesn’t understand how this stuff works out.

    This is of course Scott’s fault, unless you think Scott was super tricky to first win over the liberals and get them committed on the record.

    But again, there will be no human element here, if RDGP is 0%, and NGDP is 4.5% from 4.5% inflation, no matter what the unemployment rate, we are raising rates.

  15. Gravatar of Jason Odegaard Jason Odegaard
    2. May 2012 at 08:47

    Morgan,

    But the conclusion from that 5% inflation in 1934 is that it should have been that high, or even higher. Why? We are doing level targeting. There had been huge deflation in NGDP, so by *level targeting* the catch-up period has to be faster (higher rate) than the long-run trend rate.

  16. Gravatar of Morgan Warstler Morgan Warstler
    2. May 2012 at 08:56

    Jason,

    At 4.5% NGDPLT, acceptable inflation is only higher if RDGP is negative.

    But at 4.5% NGDPLT that’s been running for just a couple years, the idea of “make up” work is very responsive:

    4.7%
    4.3%
    4.6%
    4.5%

    We don’t swing wildly from month to month. And we don’t suddenly have to make up 12% next year.

    That you want to focus on the “make up” part of it assumes we are dropping it in on a crisis…. as if we are doing it for a crisis… as if we are doing it to get more inflation.

    We aren’t.

    Imagine dropping it in at 1998, or 2003, or whatever and suddenly it’s just a nice cap on growth, and NONE of the bad stuff happens.

    That’s the whole point here, bad stuff, really bad stuff just doesn’t happen.

    Govt. gets neutered.

  17. Gravatar of Left Outside Left Outside
    2. May 2012 at 08:59

    “The moment NGDPLT exceeds trend line, next month rates go up, and if NGDPLT exceeds it again, next month rates go up…”

    Facepalm. We should target the forecast Morgan, not last month’s figures, as Scott has explained at length…

    Also, have you even considered the seasonality of GDP and NGDP in your formulation of NGDP targeting? Rates always go up approaching Christmas and come down in the new year? Grinch!

  18. Gravatar of Morgan Warstler Morgan Warstler
    2. May 2012 at 09:14

    My god….

    the target for a blind next month is 4.5% annualized.

    so if we owe .2% we’re now going after 4.7%, oops we got 4.6%, we owe .1%, we target 4.6% – we got it! We’re back to 4.5%.

    The FORECAST is 4.5% annualized for every damn month. We don’t suddenly get a 7% forecast and TARGET IT.

    NGDP goes up 4.5% per year. Every year. Rain or shine.

    —–

    Seasonality might give you a 3 month swing in make up.

    The elasticity of the rubber band will tight enough, that short term human political intervention is impossible.

  19. Gravatar of Saturos Saturos
    2. May 2012 at 09:20

    Morgan, You said,

    “Imagine dropping it in at 1998, or 2003, or whatever and suddenly it’s just a nice cap on growth, and NONE of the bad stuff happens.

    That’s the whole point here, bad stuff, really bad stuff just doesn’t happen.”

    Okay, but Matt O’Brian was talking about the role of NGDPLT now and in the Great Depression, where you need a lot of catch-up growth, as all of us MMs have been saying.

  20. Gravatar of Major_Freedom Major_Freedom
    2. May 2012 at 09:27

    I feel somewhat sorry for all of you people who feel so giddy and anxious whenever NGDP targeting appears to be inching closer to becoming implemented.

    I feel sorry for you because NGDP targeting will fail if it ever does become implemented.

    The economy’s structure is coordinated and sustainable, or not coordinated and unsustainable, not on the money side of things, but on the physical side of things. That’s where the economy must be “stabilized”, to use an awkward expression. Stabilizing “spending” is NOT the same thing as stabilizing the real side, the capital structure side, of the economy.

    Inflation of the money supply, even if for a time results in an anticipated constant aggregate spending growth rate, it nevertheless stresses and alters the capital structure of the economy in a physically unsustainable, on the basis that it brings about relative spending and price changes other than what would have resulted from individual acts of cash holding, consumption, and investment.

    The fundamental error of NGDP targeting is that it seeks to overrule the capital structure effects that dispersed changes in cash holding would have had. It sloppily tries to reverse the dispersed changes cash holdings with focused changes of cash to an arbitrary group of people, as if one person’s cash holding, consumption, and investment patterns, can be substituted for anyone else’s cash holding, consumption and investment patterns.

    We are only obligated to look at the abstract concept “aggregate spending”, and pretend that when one group of people change their cash holding, consumption, and investment behavior, that as long as some other arbitrary group of people have their cash holdings changed, such that they bring about the desired general “spending” statistic, that there is allegedly no stressing of the capital structure, and that there is allegedly no unsustainability that requires accelerating money supply inflation in order to bring about the same level of “spending.”

    Aggregate statistics obfuscate what really matters, namely, the individual human actors. Overruling the cash holding versus “spending” behavior of individual human actors, by changing some individual’s cash holdings via inflation, discoordinates individual human behavior in the otherwise regulating price system.

    Inflation is essentially a deregulation of the price system, and the price system is the only way that individual human actors can economically calculate and coordinate their behavior. When you have millions if not billions of individuals seeking to benefit themselves by income maximization, the non-deregulated price system coordinates their behavior so that the resulting capital structure is sustainable in the physical sense. That which is invested in a dispersed fashion, is in line with what is made available via real savings in a dispersed fashion.

    Nobody, and I mean NOBODY can know, what the true supply of real savings is at any given time. Any attempt to know will only produce a historical account of what used to be. What is, is actually unobservable. What is somewhat observable however are prices. I say somewhat because even price observation is historical. Nobody can know what all the prices ARE right at this moment. They can only know what they all were in the past.

    Thus, when individuals in a division of labor act to maximize their incomes, they do so based on the prices they can observe, and not all prices everywhere at that moment.

    This is important to grasp how the coordinating market IS because it makes it possible to know how it can become discoordinated. Inflation discoordinates the planning of individual actors, by bringing about relative spending and hence price changes in certain parts of the economy’s capital structure. It doesn’t just increase all prices at the exact same percentage. That’s not how inflation works. Inflation is a program that changes certain key parts of the economy before others. This is the source of unsustainability.

    Back to NGDP targeting, because any spending anywhere is just as good as any other spending anywhere else, NGDP targeting advocates fail to see that it brings about changes in relative spending and prices, and that it brings about changes in certain key parts of the economy.

  21. Gravatar of dwb dwb
    2. May 2012 at 09:30

    @Morgan
    “from your lips to gods ears”

    sorry, turns out i work for the other one.

  22. Gravatar of Morgan Warstler Morgan Warstler
    2. May 2012 at 09:33

    Saturos,

    IT isn’t going to happen. And Scott knows it.

    We aren’t going to get NGDPLT but only if we have to make up 12%.

    And if you pushed Scott, he’d say (and so would all MM), that even if we start today with NO catch up growth, that’s still OK with them.

    Matt OBrien, really doesn’t get this.

    It is NOT technically an argument for more inflation today.

    It is an argument that if BY MAGIC we had been targeting NGDPLT and somehow we hadn’t seen Barney Frank driven into a tree, and 2005-2008 did not happen, then today we would owe 12%.

    But that’s it. Only in magic land.

    What we have is people who want more inflation today SO BADLY that they may for a little while think they want to do NGDPLT.

    Evans I’m sure has GIVEN UP.

    If you gave him truth serum, he’d say…. he’d privately look liberals in face and argue to get out of this hole, we are going to accept surrender to Scott Sumner and his evil plan to force public employees to fork over productivity gains if they ever want raises again.

    He’d say that giving bad credit risks houses to pay off Dem voters never happens, and he’d admit that liberals are going to have to really let go of more govt. spending as their prime game strategy.

  23. Gravatar of Michael Michael
    2. May 2012 at 09:48

    Morgan, what about our recent history of profligate-spending “conservatives”. The past 30+ years has thoroughly discredited the idea that big government spending is driven by one party. Does NGDPLT also mean that we have to be a little more careful about what wars we choose to be involved in?

  24. Gravatar of Morgan Warstler Morgan Warstler
    2. May 2012 at 09:55

    YES.

    Wars raise NGDP, so Main Street borrowers hate them.

    My god, WTF don’t people think Ron Paul’s crowd will like this stuff?

    Remember, the real choice isn’t guns or butter…. it is keep your money vs guns. keep your money vs. butter.

    Now we will finally get everyone correctly aligned, right now we have a ton of conservatives who support guns simply because they ate butter.

    There are prolly some liberals who only hate guns because they love butter.

    But there is no one who wants butter just because they hate guns.

    When people are seeing their rates go up, and can point to a nice FAT CBO SCORE that says who much this thing affects NGDP and thus your rates for next X years….

    In such a world, the economy itself doesn’t like guns or butter.

  25. Gravatar of Major_Freedom Major_Freedom
    2. May 2012 at 10:26

    Let me make this absolutely clear by putting myself (and imagine yourselves doing the same) at the center of perception (since we’re all individuals):

    There is a scale of incomes. Some lower, some higher. Those who have higher incomes can afford to pay higher interest, and those who have lower incomes can afford to pay lower interest.

    I have $10 million cash. I am a money lender.

    I can loan this money at a particular rate, or series of rates, according to everyone else’s ability to pay interest. To an individual, I can loan less at higher rate, or more at a lower rate. I prefer the highest rates I can get before I loan to others who can afford lower rates. Since interest payments would be constrained to their incomes, I must separate my $10 million into a series of loans, such that the interest payments are no greater than their incomes.

    I can loan $2 million at 25%, $2 million at 20%, $2 million at 15%, $2 million at 10%, and $2 million at 5%. This would result in periodic interest payments of $500k, $400k, $300k, $200k, and $100k. These are the borrower’s maximum they can pay. These are their incomes.

    Now suppose inflation of money takes place. Inflation increases the cash balance of some arbitrary group of people. It could be me, it could not be me. Suppose it is me, the money lender. I receive a round of newly created money. My cash balance increases from $10 million to $20 million. Everyone else’s cash balances are unchanged at this point. Everyone else’s nominal incomes are unchanged at this point.

    Now what will I do as money lender? I now have $20 million to lend. I can’t just loan out the additional $10 million in the same way and at the same rates as with the first $10 million, because my potential borrower’s incomes are at this point still constrained to $500k, $400k, $300k, $200k, and $100k.

    The only way I can loan out this additional $10 million would be at lower rates. What rates might exist if I were to loan $20 million to the same people with the above maximum incomes? It might be the following: $500k/$4 million = 12.5%, $400k/$4 million = 10%, $300k/$4 million = 7.5%, $200k/$4 million = 5%, and $100k/$4 million = 2.5%. (Half of what they otherwise would have been).

    Of course I am assuming each borrower borrows double the principle, but no matter where I allocate the additional $10 million, since their incomes are at this point constrained, I must lower the rates if I am going to earn any interest at all on that additional $10 million of inflation.

    So in this one example, we see that inflation has altered interest rates on my loans. Initially, it decreased them from where they otherwise would have been. Of course we could ask what happens after the borrowers spend the money I loaned to them, and what that would do to profits and interest rates elsewhere in the economy, sometime in the future, but for now, I lent the money at rates that are lower than what they otherwise would have been, since I am always constrained to my borrower’s actual incomes, not what incomes they might earn next year once the money has spread to enough people via respending.

    What does this do? Well, now I have to imagine myself as one of those borrowers. Suppose I am a borrower who invests in various capital goods. Suppose I am the first borrower, the one who earns $500k income, and can only pay $500k in interest. Instead of me borrowing $2 million at 25% for an interest of $500k, I can now borrow $4 million at 12.5% for an interest of $500k.

    What will I do? I will now invest in different projects than I otherwise would have invested in, because my borrowing costs are different. They are lower than they otherwise would have been. I will invest in the projects that would have been unprofitable at 25% borrowing costs, but are profitable at 12.5% borrowing costs.

    Inflation, as you can see, brings about a revolution in the structure of production. Instead of higher return investments seeing an influx of capital, there are now lower return investments seeing an influx of capital. Of course those capital goods prices will be higher in price than they otherwise would have been, because I bring forth an additional demand for them. In addition, that additional demand then sends signals to investors to invest more in those particular capital goods, rather than other particular capital goods.

    As this happens, the physical structure of the economy is changed from where it otherwise would have been.

    Without the inflation, or before the inflation gets to them, consumers were saving such that the return on those capital goods were 50%, 40%, 30%, 20%, and 10%. These rates have a particular level of saving associated with them.

    With the inflation, the capital structure of the economy is made in a way apart from what would have otherwise resulted from existing savings. Consumers actually saved only $10 million by abstaining from consuming that $10 million after they have produced to earn it. They gave that money to me to lend, which would have resulted in me lending at higher rates, which would have resulted in borrowers investing in a particular set of capital goods associated with those higher rates.

    The particular capital goods invested in are different than they otherwise would have been. This is all brought about by monetary conditions only, and not saving. Because of that, the relation of saving and investment, in real terms, in physical terms, becomes disjointed. Consumers are saving X, which would have brought about sustainable capital structure Y, but inflation has brought about unsustainable capital structure Z.

  26. Gravatar of RJ RJ
    2. May 2012 at 10:44

    I have no training in economics, just a nascent interest, and am hoping to get some background reading done this summer when not worrying about finals and term papers. But until then, can somebody help me with this?

    I’ve seen this equation often, NGDP = RGDP + inflation. But what is inflation? I thought it was a general measure of prices rising. But Major_Freedom says this,

    “Now suppose inflation of money takes place. Inflation increases the cash balance of some arbitrary group of people.”

    And now I’m confused. Can’t prices rise without necessarily pumping more cash into the economy? Also, is inflation really a real thing? I thought NGDP was the thing people actually measure, and the real version of that is just scaled based on an estimate of prices compared to some reference year.

    Help!

  27. Gravatar of dwb dwb
    2. May 2012 at 10:47

    Consumers are saving X, which would have brought about sustainable capital structure Y, but inflation has brought about unsustainable capital structure Z.

    you have not shown that those extra projects are bad, more risky, or unsustainable in your toy model, just that a different set of projects gets done. In fact, it could well be the opposite: higher risk projects require a higher return, therefore high interest rates might be selecting high risk projects and by injecting money more lower risk projects get done.

    All one can logically conclude is that, yes, a different set of projects gets done. nothing more. Its impossible to make a value judgement as to what projects are good or bad.

    This is one of those lurking Rothbardian contradictions. If in your model GOLD was found, and that was the source of the money, then you would say those projects were good (even if resulted in the same set of decisions and projects). Basically, its axoimaticaly bad because thats what you want to prove.

  28. Gravatar of Benjamin Cole Benjamin Cole
    2. May 2012 at 10:52

    Eurozone, Japan, USA—is targeting low inflation a failure? Seems so. It win;t working, Jack.

    A case can be made that central banks ought to only target real growth. Central banker and staff pay should be tied to real growth.

  29. Gravatar of Major_Freedom Major_Freedom
    2. May 2012 at 10:53

    Too often Keynesians and Monetarists think in money terms only, and believe this misguided thought: “Well if consumers save money, it doesn’t mean they invest that money, and so that opens up the possibility for the Fed to create new money so that investment spending will increase just the idiotic classicals assumed happens, but won’t happen unless the Fed stands ready to make up any shortfall.”

    Keynesians and Monetarists, by thinking in this way, are ignoring the real economy. They are ignoring the fact that even if the fed perfectly offset every cash “hoarding” that “should” have went to investment, with new money inflation that increases nominal investment to match the saving, i.e. cash hoarding, it comes at the cost of different interest rates, different capital goods being invested in, and a different, physically unsustainable economic structure that requires accelerating inflation of money to coax investors into maintaining it.

    The reason why we see almost perfect correlation between drops in inflation and spending, and depressions, is not because drops in inflation and spending CAUSE the problems associated with the fall in spending. The problems associated with the fall in spending go back to the boom period, not the bust period when corrections are made, when output falls, and when employment falls.

    Because maintaining an inflation distorted capital structure requires continually accelerating inflation, what almost always happens is that central banks who want to avoid currency collapse, or at least runaway consumer price inflation, typically stop printing, or at least reduce the rate of printing, before this happens. This cessation/reduction in printing and spending finally exposes the physical distortions, via price and demand based signals. All the bad investments that would have been liquidated, are not because central banks are typically reckless in accelerating inflation. So we only see SOME corrections made, and before long, the central banks are again printing away, causing another, larger, unsustainable boom.

    This is why Keynesians and Monetarists believe the problem arises, from the lack of printing and spending. They IGNORE the problems that only the Austrians can infer, during the “happy times”, the boom. The problem is that because the Austrians are saying the end result of using inflation to prevent any corrections from occurring is hyperinflation, the Keynesians and Monetarists only observe the central bank reducing its inflation to avoid it. They don’t understand that the inflation induced increasingly distorted real economy is physically impossible to last.

    The physical limitations of the availability of real capital, what is called the “scarcity of goods”, or just “scarcity”, which by the way is a crucial economic concept that NOBODY on this board EVER brings up, is the ultimate limiting factor for an inflationary economy, indeed any economy. Inflation cannot eradicate economic scarcity of real goods. Forget about “idle resources” and “sticky prices”, the crucial concept of scarcity means that inflation cannot be used to eradicate scarcity that is more and more asserting itself as the capital structure becomes more and more stressed due to inflation.

    Maybe I am the only one on this board who can grasp this, but inflation for the last 40 years has so distorted the world’s economy, that it has resulted in such dependency on the central bank that even if the central bank so much as reduces the rate of inflation, the house of cards economy will fall and a sustainable economy will slowly rise from the ashes, in an incredibly painful way, at which point you’ll hear the Keynesians and Monetarists yapping again for more crack.

    Inflation cannot abolish the law of physical scarcity. If NGDP targeting were ever going to be instituted, then this is will be the eventual outcome: Forcing nominal spending to never fall below 5% growth, despite the fact that the increasingly distorting real economy grows louder in calling for drops in spending that accompany the needed corrections that won’t go away, will require accelerating rate of inflation of the money supply, and thus eventual currency breakdown. So at first, things might seem all rosy, because inflation of the money supply is relatively subdued in order to bring about the same 5% NGDP spending. But over time, because the introduction of inflation itself stresses the capital structure of the economy, the central bank will have to slightly increase the rate at which it creates money each time, so as to coax investors into spending slightly more in nominal terms than they did before, so that they can be deluded into spending in such a way that NGDP is rising all nice and smooth.

    Meanwhile, as the central bank accelerates the rate of inflation of the money supply, as the economy becomes more and more stressed, as the needed corrections pile up, physical reality continues to assert itself stronger and stronger, and the law of scarcity becomes more and more apparent in the form of a perceived need for more and more inflation to prevent correction.

    Either destruction of the currency, or painful correction. Either hyperinflationary depression, or deflationary depression. These are the inevitable outcomes. Since we actually experience occasional busts, and central bank stinginess, we thankfully don’t see these inevitable outcomes. The only reason we still have a monetary system and a functioning price system is because the central bank is “stupid” in not inflating more, and “heartless” in making people feel pain through recession. If they were “compassionate”, and if they were “smart”, then we would have long ago seen Zimbabwe inflation here.

    There is an underlying, mother boom of all booms that has been building up since 1971, if not before. This is the US dollar reserve world fiat currency boom. Even the deep crash of 2008 was but a mere taste of what’s now inevitable. The rest of the world is no longer as coaxed by the dollar boom. They are buying less US debt, and we’re getting ever closer to total dollar and/or economic breakdown. The central banks of the world are so blinded by the illusion of inflation bringing prosperity, that they have made the world addicted to inflation. The stock markets are now moving in tandem to central bank balance sheets. The Fed, as part of the US government, is now the single largest owner of government debt.

    You hear the talk these days of “Interest rates are probably going to up at some point, when the economy recovers”? Rising interest rates are going to be but a blip in the total set of problems that will be exposed. The problems exposed in 2008 were never fully corrected. More problems were created. The next bust is going to be even bigger than 2008. And it can’t be saved by NGDP targeting. The pressure is eventually going to get so strong for NGDP to fall, that the only choice the Fed will have is to hyperinflate the currency, and thus lose control of NGDP, or abstain from inflating and letting the corrections occur, and thus lose control of NGDP.

    The market eventually overwhelms standing armies. It will eventually overwhelm a monopoly counterfeiter.

  30. Gravatar of Ben Johnson Ben Johnson
    2. May 2012 at 11:09

    This may not be the most appropriate post to file this under, and may have long ago been answered, but:

    Who would make a better Fed chairman, Scott Sumner or an NGDP-targeting robot?

  31. Gravatar of Major_Freedom Major_Freedom
    2. May 2012 at 11:18

    dwb:

    you have not shown that those extra projects are bad, more risky, or unsustainable in your toy model, just that a different set of projects gets done.

    You’re right, I didn’t, because the first step in understanding this is to at least accept that inflation alters the projects, which by the way DON’T get “done”. They get started yes, but they aren’t sustainable.

    The explanation for why the different set of projects is unsustainable (I don’t use the word “bad”, since it’s too emotion-laden), is because the different projects that are started require more capital than consumers have saved.

    You do accept that when consumers save more, that ceteris paribus interest rates fall, right?

    Well, if you accept that, and you accept that inflation of money in the loan market decreases interest rates, then it is easily seen that inflation of money in the loan market sends signals to investors that make it seem AS IF consumers are saving more, when they really are not.

    Going back to the physical part of the economy once again, the fact that consumers are not saving the requisite resources that such decreased interest rates would seem to imply, it means that investors start projects, purely rationally by the way, that cannot be completed because the required resources are physically not available to them. Investors only have resources that consumers ACTUALLY save and make available to them, in the real sense, and no more. But the decreased interest rates coax investors into starting projects that require MORE resources than are actually available.

    I realize that the implications of this means you must accept that inflation brings about the business cycle, and all the unemployment associated with it, which would of course completely turn your worldview upside down. I also realize that this puts me at an immediate disadvantage when it comes to how you approach what I am saying.

    In fact, it could well be the opposite: higher risk projects require a higher return, therefore high interest rates might be selecting high risk projects and by injecting money more lower risk projects get done.

    That’s nonsense. If interest rates are lower, then the borrowing costs for the riskier projects would generate even larger profits, thus exacerbating investment in riskier projects.

    When borrowing costs are higher, that makes the more risky investments LESS profitable.

    You have it backwards.

    All one can logically conclude is that, yes, a different set of projects gets done. nothing more. Its impossible to make a value judgement as to what projects are good or bad.

    No, that’s false. One can logically conclude that different interest rates results in physical resources being redirected into employments that require more saved resources than actually exist.

    It’s not a value judgment, it’s a scientific judgment of what is physically sustainable and what is not.

    This is one of those lurking Rothbardian contradictions. If in your model GOLD was found, and that was the source of the money, then you would say those projects were good (even if resulted in the same set of decisions and projects). Basically, its axoimaticaly bad because thats what you want to prove.

    No, I wouldn’t say they would be “good.” I would also say gold would also bring about malinvestment if it enters the loan market first. The point is that it would be minimized compared to keyboard clicking money inflation.

    The fact that you are bringing up normative judgments into this, only tells me that you consider inflation as beneficial not in the economic sense, but because it’s somehow more moral or just or ethical.

  32. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    2. May 2012 at 11:37

    Now that he has a book to sell Krugman is willing to mix it up with the rabble;

    http://www.reddit.com/r/IAmA/comments/t1ygb/iama_nobel_prizewinning_economist_and_new_york/

    ———quote———–
    Question (Silent_Storm):
    Hi Dr. Krugman. How do you feel about NGDP targeting, and do you think there’ll be a QE3 anytime soon?

    Answer (nytimeskrugman):
    I don’t share the view that there’s some fundamental reason why NGDP is better than other ways to make the Fed take its dual mandate seriously; price level targeting, or just a symmetric treatment of unemployment and inflation, could be better in principle.

    But I do see the point that nominal GDP targeting (for those who have no idea what this is about) could be a way to de facto raise the inflation target without saying so. So I’m OK with it as an idea.

    About QE3: God knows. Logically, the Fed should do it. But logically the Fed should be doing lots of stuff it isn’t.
    ————endquote———-

  33. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    2. May 2012 at 11:40

    How we can tell it’s really Paul Krugman;

    ‘About partisanship: I don’t think I’m being partisan, I think I’m being honest. The way many people try to seem nonpartisan is by pretending that bad ideas aren’t really bad, which I won’t do. It’s not partisan to say, for example, that Paul Ryan’s budget is a fraud. It’s just the uncomfortable truth.’

  34. Gravatar of 123 123
    2. May 2012 at 12:10

    Scott, I remember this is not the first time Evans favourably mentions NGDPLT.

    BTW you need to respond to this: http://econlog.econlib.org/archives/2012/05/what_im_reading_19.html

  35. Gravatar of Morgan Warstler Morgan Warstler
    2. May 2012 at 12:21

    NGDP-targeting robot?

  36. Gravatar of Adam Adam
    2. May 2012 at 12:24

    First, congrats.

    Second, to me as a lay follower, this doesn’t seem like a major step for Evans to take. Having already called for the Fed to accept more inflation as long as necessary for employment to recover, wasn’t he already basically in the same ballpark? Or is there some important conceptual distinction between the “Evans Rule” and NDGP level targeting? Obviously they are defined in different terms, and the latter is less ad hoc, but is there something else I’m missing?

  37. Gravatar of Morgan Warstler Morgan Warstler
    2. May 2012 at 12:28

    Patrick, this was my question that was immediately downvoted into oblivion:

    http://www.reddit.com/r/IAmA/comments/t1ygb/iama_nobel_prizewinning_economist_and_new_york/c4iuypc

    —–

    Once again we see, there is no real support for NGDPLT other than “to de facto raise the inflation target without saying so.”

    This is proof:

    1. DeKrugman hasn’t really thought it through.
    2. Scott is wasting his time trying to sway them.

  38. Gravatar of ssumner ssumner
    2. May 2012 at 12:34

    Thanks Frederic,

    DanC, I’d focus on two concepts:

    1. Target the NGDP forecast (i.e. set policy so that forecast NGDP equals target NGDP.)

    2. Do level targeting–promise to make up for overshoots and shortfalls.

    Vivian, I thought people would say that. Maybe I meant the 12 regional Presidents.

    Thanks Ben, You’ve been a huge help.

    Anon1, Thanks.

    Morgan, There is also level targeting.

    dwb, I agree. The site often crashes when busy. The little hamster powering the site gets tired of spinning the wheel.

    Thanks Negation and Don. Of course the other MMs and many commenters also helped.

    RJ,

    1. Ignore Major Freeman
    2. Yes, prices can rise without more money. But MF says thats not inflation, even if the CPI rises 100%

    Ben Johnson, A robot.

    Patrick. Thanks, that’s interesting.

    123, I’ll take a look.

  39. Gravatar of david david
    2. May 2012 at 12:40

    Didn’t Sumner thoroughly thrash the Austrian inflation-disrupts-price-calculation argument a while back? Before his sabbatical from the blog.

    It directly conflicts with the mainstream EMH, at least, what with the systematically stupid money-illusioned investors. Austrians have no theory of general price equilibration, they want prices to adjust globally but not adjust globally at the same time. You can’t have both ways, folks. If calculation works at all, it works in the intertemporal market too and people adjust to the quantity of money.

    That dispenses with Hayekian triangles. The distributional “but banks get the money first!” argument seems a recent innovation, but it falls apart the moment you apply it to international flows. Foreign investors have money first. So what?

  40. Gravatar of dwb dwb
    2. May 2012 at 12:43

    which would of course completely turn your worldview upside down. I also realize that this puts me at an immediate disadvantage when it comes to how you approach what I am saying.

    ha. the world is round and space is curved, not flat, so there is no upside down.

  41. Gravatar of Major_Freedom Major_Freedom
    2. May 2012 at 13:17

    RJ:

    1. Ignore Sumner’s statement to ignore me. He just can’t refute my arguments, and so he is now relegated to tribal warfare games.

    2. There cannot be a sustained, general increase in prices without more money. Yes, in the short run, prices can rise without any money inflation, but this is limited to how much money exists, which means prices can only rise by way of people drawing down their cash balances. People’s cash balances are of course finite at any given time, so you won’t see sustained general price increases from existing cash balances. There needs to be inflation of the money supply for that to occur.

    After all, when people talk about inflation, they don’t mean some prices rising here but not there, or a one day increase in prices followed by days of falling prices. No, they mean a sustained, general increase in prices.

    ssumner:

    But MF says thats not inflation, even if the CPI rises 100%

    You’re arguing over definitions. I call that price inflation. You call it inflation. What’s the problem? I’m just using the original definition of inflation, before it was ruined by Keynesians.

    If the CPI rises 100%, then there must be money available to increase spending such that consumer prices rise 100%.

    While it is possible in principle for consumer prices to rise 100% without any inflation of the money supply at that time, it would require incredibly high existing cash balances to do it relative to prices, and I don’t see that happening any time soon. You’re talking about an incredibly unlikely situation.

    But yes, even if CPI rises 100%, then I would not say THAT is inflation, because there wasn’t an increase in the money supply. In other words, it’s just a definition thing. You call price increases “inflation”, I call that price inflation. I call increases in the money supply “inflation”, you call it increasing the money supply.

    david:

    Didn’t Sumner thoroughly thrash the Austrian inflation-disrupts-price-calculation argument a while back? Before his sabbatical from the blog.

    He tried, but did not succeed.

    It directly conflicts with the mainstream EMH, at least, what with the systematically stupid money-illusioned investors.

    Mainstream EMH and anti-EMH are both consistent with empirical data. But only anti-EMH is consistent with economic principles.

    Austrians have no theory of general price equilibration, they want prices to adjust globally but not adjust globally at the same time. You can’t have both ways, folks. If calculation works at all, it works in the intertemporal market too and people adjust to the quantity of money.

    Austrians do not “want” prices to adjust at the same time. Austrians just recognize that prices do not in fact adjust at the same time in the presence of inflation, because inflation doesn’t enter everyone’s bank accounts at the same time at the same rate. It enters the economy at distinct points, and because of that, there is a change in relative spending and relative prices.

    That dispenses with Hayekian triangles.

    What dispenses with it? Are you saying production doesn’t take time? Are you saying that consumption precedes production? Are you saying that spending money on finished goods precedes investment spending in the production of those finished goods?

    The Hayekian triangle is far more accurate a framework that the circular logic saddled circular flow of income.

    The distributional “but banks get the money first!” argument seems a recent innovation, but it falls apart the moment you apply it to international flows. Foreign investors have money first. So what?

    It does not fall apart in this way. ABCT is not a nationalistic theory.

    ABCT is not a theory about whether domestic investors get the new money first or whether foreign investors get the new money first. It makes no distinction between nationalities. It only talks about individuals, not their nationalities.

    dwb:

    “which would of course completely turn your worldview upside down. I also realize that this puts me at an immediate disadvantage when it comes to how you approach what I am saying.”

    ha. the world is round and space is curved, not flat, so there is no upside down.

    Burn! Hey, when you finish with the geometry, maybe you’ll come join the economics discussion.

  42. Gravatar of Liberal Roman Liberal Roman
    2. May 2012 at 13:35

    Real victory will be when people stop saying “radical” around the idea of NGDP targeting.

  43. Gravatar of Morgan Warstler Morgan Warstler
    2. May 2012 at 13:39

    So I try to explain to Matt OBrien the mistakes he makes on NGDPLT, and he insists I simply don’t understand how a level target works.

    To him it just means INFLATION NOW!

    He has no grip whatsoever on how it keeps FDR from growing govt. or Barney Frank from giving away home loans.

    He literally insists that somehow govt. keeps growing.

    You can even see it in this thread, lefties haven’t truly grasped whats going on…

    There will be no support for NGDPLT from the left… the closer it comes to happening, to the more they will turn and fight it.

    —-

    It should not be this hard to get everyone talking about this…

    This is the most OBVIOUS elephant in the room.

  44. Gravatar of anon anon
    2. May 2012 at 14:05

    I worry that this might have been blown out of proportion. If you look at the conference video that the Atlantic links to, it turns out that Evans only made a brief remark about nominal income level targeting as possibly being a “good way to think about” the bounds of monetary policy in certain circumstances. This is interesting in a way, but it doesn’t really qualify as “support”.

  45. Gravatar of dwb dwb
    2. May 2012 at 14:11

    Hey, when you finish with the geometry, maybe you’ll come join the economics discussion.

    ha. when you are having one, and not pompously proselytizing, i will.

  46. Gravatar of david david
    2. May 2012 at 14:43

    There is no evidence for a macroeconomic distortion between relative (real) prices along the time-structure of production. The prices of intermediates move together with the prices of other things – the direct implication of Austrian capital theory, that the relative prices of some goods should be more procyclical than the others, has simply no evidence.

    And why should there be? Investors are not plausibly so brilliant that they could calculate the optimal societal time-preference (aka, the real interest rate) absent distortion yet so stupid that cannot simply add up what they are doing and realize that it does not sum to unity. You can’t have it both ways.

    So: no Hayekian triangles. They’re a marvelous theoretical construct but no more relevant that the Excess Demand Monster Functions that the general equilibrium micro guys like to dream up – they’re just another special case with a non-general production function handpicked to produce a pathological dynamic. It’s not robust.

    And “but money enters at different places and so distorts relative prices” falls apart the moment you reflect that money is entering, all the time, in hundreds of different currencies all over the world right now. Distinct points exist all over the damn world. Yet forex markets seem quite capable of dealing with these distortions without destabilizing – more dollars is rapidly recognized as depressing the value of the dollar relative to other currencies, it doesn’t fool foreign investors into solid money illusion. Why should it fool domestic investors?

  47. Gravatar of david david
    2. May 2012 at 14:44

    *relative prices of some particular goods – intermediates, etc.

  48. Gravatar of Major_Freedom Major_Freedom
    2. May 2012 at 22:46

    dwb

    ha. when you are having one, and not pompously proselytizing, i will.

    Glad that you admit you haven’t yet. First step towards improvement is admission.

    david

    There is no evidence for a macroeconomic distortion between relative (real) prices along the time-structure of production.

    There is copious evidence for macroeconomic distortion between relative prices along the structure of production.

    The prices of intermediates move together with the prices of other things – the direct implication of Austrian capital theory, that the relative prices of some goods should be more procyclical than the others, has simply no evidence.

    That is false. The prices do not move together.

    And there is evidence of pro-cyclical goods.

    And why should there be? Investors are not plausibly so brilliant that they could calculate the optimal societal time-preference (aka, the real interest rate) absent distortion yet so stupid that cannot simply add up what they are doing and realize that it does not sum to unity.

    The societal time preference is in an unhampered price system manifested in the rates of profit, and interest. These are observable. They can calculate by observing and anticipating NOMINAL rates. In a hampered economy they can’t observe the unhampered rates, hence investors being misled.

    You can’t have it both ways.

    Have what both ways?

    So: no Hayekian triangles.

    Non-sequitur. That does not follow from anything you said.

    And you still haven’t answered my questions concerning the Hayekian triangle:

    Are you saying production doesn’t take time? Are you saying that consumption precedes production? Are you saying that spending money on finished goods precedes investment spending in the production of those finished goods?

    They’re a marvelous theoretical construct but no more relevant that the Excess Demand Monster Functions that the general equilibrium micro guys like to dream up – they’re just another special case with a non-general production function handpicked to produce a pathological dynamic.

    False. It’s not a special case. It’s generalized. The above questions I asked, if you answer them correctly, IMPLY the Hayekian triangle is the correct conceptual construct. The Keynesian circular flow of income is fallacious.

    It’s not robust.

    It’s incredibly robust.

    And “but money enters at different places and so distorts relative prices” falls apart the moment you reflect that money is entering, all the time, in hundreds of different currencies all over the world right now.

    Hundreds of different points is not 7 billion points. You’re just proving my point. It does not fall apart. You just confirmed it.

    Distinct points exist all over the damn world.

    Distinct points is not all points. That’s why relative prices change.

    And it’s not just how many points. It’s how much money goes to specific points. Some points get far more than other points. Wall Street for example gets a substantial quantity of new money. That greatly affects the relative price and spending changes.

    Yet forex markets seem quite capable of dealing with these distortions without destabilizing – more dollars is rapidly recognized as depressing the value of the dollar relative to other currencies, it doesn’t fool foreign investors into solid money illusion.

    This is false. Investors of foreign exchange also cannot observe the unhampered interest rates in each currency, so they are misled as well. See the Russian Ruble debacle.

    Why should it fool domestic investors?

    Because they cannot observe the unhampered rates. They can only observe the nominal rates, which are a product of monetary inflation.

  49. Gravatar of Robert Robert
    2. May 2012 at 23:07

    I have a few questions that probably show my lack of a total understanding of ngdp targeting, but none the less seem important.

    If different countries at different stages of development experience different levels for real gdp growth; and ngdp targeting fills in the other side of that 5%(for example) ngdp growth target with inflation(i know you hate using that term), then when does the central bank know to scale back that that 5% ngdp growth to 4% or 3% ngdp growth? Also how and how early would that target rate change be signaled to the market? Would there be a mechanism for knowing when to change the ngdp growth rate?

  50. Gravatar of anon anon
    3. May 2012 at 01:39

    Robert, you only need to scale back NGDP growth if you want to target the price level path in the long run, as opposed to the path of nominal incomes. It’s not clear which is best, but see this post by Scott for a way of targeting NGDP in the short run and prices in the long run.

  51. Gravatar of Saturos Saturos
    3. May 2012 at 01:41

    david, Stable inflation doesn’t disrupt calculation, but unstable inflation does. That’s a standard textbook argument.

  52. Gravatar of ssumner ssumner
    3. May 2012 at 08:38

    David, The other big problem is that many Austrians overlook the (approximate) super-neutrality of money.

    MF, People don’t care how you define inflation. They are interested in price level changes.

    Liberal Roman, Good point.

    anon, I’d like to see the exact quotation–perhaps I assumed more than was actually there.

    Robert, Inflation doesn’t matter, only NGDP growth matters. Hence no need to adjust the NGDP target. If you insisted on doing so, then you’d probably use the Fed’s estimated trend rate of RGDP growth. Check out the link in anon’s comment.

  53. Gravatar of Major_Freedom Major_Freedom
    3. May 2012 at 09:07

    ssumner:

    MF, People don’t care how you define inflation. They are interested in price level changes.

    Nobody is interested in price level changes except price level change statisticians who have nothing better to do.

    Real life investors and sellers care about price spreads, not price levels. They don’t care if the price level will go up or down. They only care about the spread of prices of their means of production and the expected prices of their output.

    I don’t care how you define inflation. I define it as an increase in the quantity of money. Others define inflation as increase in prices.

    Arguing over definitions is silly and pedantic.

  54. Gravatar of Its catching… « Left Outside Its catching… « Left Outside
    4. May 2012 at 00:02

    […] Its catching… One down, eleven to go […]

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