A horrible accident occurred at the intersection of economics and politics
John Tamny’s byline at Forbes magazine states:
John Tamny, Forbes staff
I cover the intersection of economics and politics
He has a new article that starts off with a quote from Mises:
“No individual and no nation need fear at any time to have less money than it needs.” – Ludwig von Mises, The Theory of Money and Credit
That’s certainly good to know. Given that monetary theory is symmetrical, if a 99% drop in the money supply has no real effects, then we also don’t need to fear hyperinflation. As Tamny says, “money is merely a measure.” And no country ever went into a depression by changing to the metric system, did it?
Tamny starts the article by noting that late in his career Friedman began to have doubts as to whether a money supply target was best. From this he inferred (I kid you not) that Milton Friedman had repudiated monetarism. Then it starts to really go downhill. He goes on to argue David Beckworth and Ramesh Ponnuru are members of the monetarist school that was abandoned by Friedman. That’s right, Tamny claims that market monetarists also believe in targeting the money supply. I suppose he saw the term ‘monetarism’ in the market monetarist name, and figured no further investigation was needed.
I know what you are thinking, there’s no way respected magazine like Forbes could publish anything so idiotic. Everyone knows the market monetarists agree with the late Friedman, the one who was skeptical of targeting the money supply. Everyone except John Tamny and the editors at Forbes.
But perhaps we shouldn’t be surprised. Didn’t Forbes publish an article a couple years ago claiming that fans of inflation targeting wanted to impose a regime where all prices were fixed, where technological progress in electronics would not reduce the price of TVs and computers? Yes they did:
Taking this further, if price stability were policy, it would still be the case that a phone call from Houston to Dallas would cost $15 for a half hour of conversation. It would similarly mean that we’d be paying thousands of dollars for flat-screen televisions, not to mention even more for computers that perform very few functions.
And who was the author who made that monumental blopper? Why the very same John Tamny.
If Tamny hadn’t made the following statement in the new article:
Monetarism’s most notable modern supporter is Ramesh Ponnuru of the great National Review magazine. Ponnuru has gulped the Kool-Aid as it were, and he’s joined up with a former Treasury economist David Beckworth (presumably one of the minds behind the dollar’s destruction and resulting crack-up during the Bush years) to revive the idea. Policy analyst Timothy Lee has jumped on board to parrot the other two, proving that even those thought to be nominally libertarian can be taken in by central planning at times; the false logic behind their thinking fairly reduced to “Weak Economy? Just Add Dollars.”
I would stop now; there’d be no point in rubbing it in. But alas he did use the term “Kool-Aid” so I’m afraid I’m not done yet.
Tamny continues with a bizarre discussion of the “gold standard.” Market monetarists believe that a revived gold standard would risk the sort of deflationary depression we experienced in the interwar years. Here’s Tamny responding to the famous Eichengreen graph showing countries began recovering after they left the gold standard:
To begin, the writers assert early on that “During the Great Depression of the 1930s one country after another abandoned the gold standard – a decision vindicated when they recovered in the same order.” The latter is interesting, and wildly false.
And what is the evidence that it is wildly false? He doesn’t present any, other than to claim the US was prosperous after WWII, despite returning to the gold standard. Here I’ll have to give Tamny credit for not dodging responsibility for the interwar years by claiming it “wasn’t really a gold standard.” It certainly wasn’t a well run gold standard, but all through the Great Contraction of 1929-33 dollars could be converted into gold at $20.67/oz. Tamny’s claim that post-war prosperity was caused by the gold standard is an argument I’ve never heard before, probably because after WWII not only were Americans not allowed to convert dollars into gold, but it was illegal for Americans to even own gold from 1934 to 1976.
I don’t object to people noting that Bretton Woods had some characteristics of the gold standard; I’ve made that argument myself. But I wish the gold bugs would get the story straight. Half of them seem to think the US monetary system of the 1920s wasn’t really a gold standard, and half seem to think Bretton Woods was. Which is it?
Tamny continues:
Indeed, quite unlike nearly all religions that are based on faith, the stock/flow properties of gold are what make it so attractive as a money measure. Gold isn’t faith based, rather its impressive stability has been a market fact for hundreds of years.
This is written immediately after the price of gold went from $300 to $1900, and then back to $1600. Of course the gold bugs will tell you the value of gold was stable throughout that period, it was everything else that went crazy.
Tamny continues:
About their call for a “monetary regime change”, Beckworth and Ponnuru seek a new policy that “learns from both the successes and failures of the past.” If so, it’s apparent they’re not very familiar with the recent past because their monetarism was once again tried from 1979-82 and was a stupendous failure.
Tamny doesn’t seem to have any idea why monetarism was widely assumed to have failed. (Put aside the issue of whether it actually failed.) The critics did credit monetarism with reducing inflation from 13% in 1980 to 4% by 1982. I would expect a hard money guy like Tamny to view that as a success. But no, that’s not just a failure, it’s a stupendous failure. The critics did complain that velocity fell in 1982, and this made the recession worse than expected. But Tamny’s already told us that no country can ever have too little money, which means one can also never have too little velocity. After all, money is just a “measure.”
It’s hard to pick out a most embarrassing line in the article, but this surely comes close:
No doubt [Beckworth and Ponnuru] both would argue that they’re merely seeking stable money growth;
Yeah, market monetarist . . . famous for advocating stable money growth.
When Forbes published the previous article claiming that inflation targeting proponents like Bernanke wanted to keep all prices fixed, I wondered if it was just a fluke. Forbes is a relatively well known publication. Surely they couldn’t be that clueless? It looks like I was wrong.
PS. David Beckworth finds even more nonsense.
Tags:
10. June 2012 at 18:35
John Tamny said that the MOST critical factor in economic growth is not low taxes; it is not a low regulatory burden; it is not free trade. No, the most critical factor in economic growth is “a dollar that is unchanging in value.”
I really have no idea what this means – a dollar that is unchanging in value. Someone needs to teach him how expectations of nominal aggregates drives investment decisions. A stable dollar is good, but stable expectations are better.
http://www.forbes.com/sites/johntamny/2012/01/08/come-on-america-show-some-pride-and-end-the-recession/2/
10. June 2012 at 18:40
ssumner:
That’s certainly good to know. Given that monetary theory is symmetrical, if a 99% drop in the money supply has no real effects, then we also don’t need to fear hyperinflation.
You can tell market monetarists have lost the debate ages ago when their only recourse against arguments concerning the proper supply of money and who should control it, is to imagine other-worldly events like 99% of the money supply magically evaporating into thin air, as if this somehow constitutes a sliver of defense for inflation and central banking.
By that logic, we should call for the state to monopolize food production as well. I mean, what happens if 99% of the world’s food supply were to magically evaporate? We can’t leave such an important industry to the whims of the market!
Everyone knows the market monetarists agree with the late Friedman, the one who was skeptical of targeting the money supply.
Except Friedman wasn’t “skeptical” of targeting the money supply. At one point in his life (he changed his mind on this) he specifically called for a computer to target a constant rate of money supply growth.
10. June 2012 at 18:47
“Taking this further, if price stability were policy, it would still be the case that a phone call from Houston to Dallas would cost $15 for a half hour of conversation. It would similarly mean that we’d be paying thousands of dollars for flat-screen televisions, not to mention even more for computers that perform very few functions.”
I’m trying to unpack everything that’s wrong here, and the rest of the accompanying article. The biggest error seems to be the confusion of deflation with increased efficiency of output relative to wages. In his “deflationary” world where prices are falling, salaries are presumably the same or rising because he says that we would take our dollars saved on cheaper electronics and spend them on other things — he doesn’t mention falling wages. Of course, if he did mention falling wages, then it would ruin his story about more money for other spending and investments — moreover, he’d have to acknowledge how deflation prevents deleveraging.
10. June 2012 at 18:59
MF,
This
“Money is approximately super-neutral in the long run.” – Scott Sumner, http://www.themoneyillusion.com/?p=14459
is very different than this
“No individual and no nation need fear at any time to have less money than it needs.” – Ludwig von Mises, The Theory of Money and Credit
One of them ignores base velocity; the other doesn’t. One of them says “approximately;” the other says “at any time.” Asserting that money is long run neutral is true, but it doesn’t disprove the fact that monetary stimulus moves AD.
10. June 2012 at 19:22
Forbes is now the kind of publication who can’t tell the difference between Germany in 1919 and Germany in 2012 (http://www.forbes.com/sites/kylesmith/2012/05/08/news-flash-on-europe-paul-krugman-seeks-to-rebut-keynes/), I’m not sure I would use the word “respectable”.
10. June 2012 at 19:23
holy xxx how much does Forbes pay him to write this nonsense? He did not even mention Zimbabwe, Weimar Germany, or praxeology, not even once. Maybe i should sign up for a column and farm it out to my 5th grade daughter. I bet she could do a better job – i’ll just give her some words to include in sentences like she does with her spelling homework. I could cut and paste some of MFs stuff and it would make more sense. Who said there is no such thing as a free lunch??
10. June 2012 at 19:49
ssumner:
Market monetarists believe that a revived gold standard would risk the sort of deflationary depression we experienced in the interwar years.
This is false. With a 100% gold standard, there is no deflationary pressure, because once gold comes into existence, it stays in existence. Gold money is erased by the failure of any debtors, the way fiat money money is erased by the failure of debtors to pay back their debt, and/or bank bankruptcies.
The deflationary depression in the interwar years was not caused by the gold standard. It was caused by moving away from a gold standard, of injecting into the money supply a relatively large quantity of credit expansion from the banks, backstopped by the Fed.
The aggregate money supply increased almost 2/3 during the 1920s alone! How is that in any sense a gold standard? The Fed, in combination with the commercial banks, brought about an inflationary boom during the roaring 20s, but because productivity was so high, there was no serious price inflation. But the boom bust cycle is brought about by monetary inflation, regardless of whether prices are rising or not. This is what generated malinvestment during the 1920s, which culminated in a bust in 1929.
But I wish the gold bugs would get the story straight. Half of them seem to think the US monetary system of the 1920s wasn’t really a gold standard, and half seem to think Bretton Woods was. Which is it?
Neither were gold standards. Both had credit expansion. Both had inflation from the Fed. Both had aggregate money supplies rising faster than rate of precious metals discovery.
Why is this so difficult for fiat bugs to grasp? It’s so incredibly simple. When more money is created than gold/silver is created, then that is not a gold standard, and that is moving away from a gold standard. It’s as easy as 2+2=4! A gold standard means the aggregate money supply (e.g. immediately redeemable claims to gold), increases at exactly the same rate as the production of gold. No more, no less. Anything more or less, and we move away from a gold standard. During the 1920s, more money was created by the Federal Reserve System (Fed + banks) than there was gold produced. That means it wasn’t a gold standard. In addition, more credit was created than was backed by prior saving. That means it wasn’t a 100% reserve gold standard.
Maybe Forbes is clueless for the same reason…others…are clueless. Two clueless groups of people, one which insists the other is clueless. I don’t know what could be more embarrassing for market monetarists who don’t even understand history.
10. June 2012 at 19:58
It’s easy to see where Tamny gets it from. Just another political hire from a media mogul. Here’s Steve Forbes:
http://www.youtube.com/watch?feature=player_embedded&v=GqNv8_MmZV4#!
“Money is not made by government, money is organically made by people doing transactions.”
“Just think of it as you would an hour, you have sixty minutes in an hour, imagine if you floated the hour or the government trashed the hour the way it trashes the dollar. You’d have 60 minutes an hour one day, 48 the next, and 96 the next.”
“I think in five year we’ll see the dollar relinked to GOLD, it’s gotta be done.”
10. June 2012 at 19:58
This just scratches the surface of Tamny’s Greatest Hits. Check out the Flipside of Failure from mid 09, which is roughly akin to writing Residents Swim Free right after Katrina. He was very excited the Buffalo Wild Wings could now convert locations of defunct operators rather than build costly new ones, and a Chinese firm could turn the massive decline in auto sales into a ray of economic sunshine by stealing the wildly valuable Hummer brand for a mere $500 million.
10. June 2012 at 20:25
MONEY IS NOT MADE BY GOVT.
period. the end.
IT I S NOT A SOCIAL GOOD.
Starving people NEVER MEANS print more money. People dying, suffering, eating filth, whatever Zombie nightmare you can dream up, NONE OF IT justifies “oh, now we should devalue other people’s money.
The goal of BITCOIN is a noble goal. Money that cannot be debased, money that is limited in supply, ever divisible, that make govts DIE if they are run on more than tax revenues.
—–
Now look, until such time as we can run money without govt. THEN the value of MM is ONLY and EXCLUSIVELY that it
Makes guys like John Tamny and MF a better deal than they have now.
Meaning, over 5 years, 10 years, 20 years…
MM has to GUARANTEE less inflation than the current system.
Or you don’t get to have MM!
That’s reality.
You either sell it to win over Ron Paul, and show them how it crushes the govt. on the rocks of fat public employee despair, or you won’t get what you want.
—-
Look guys, I love y’all – but this thing here, it is another card that gets played to shrink govt. OR IT DIES.
The fight isn’t fair now.
It isn’t going to ever be a fair fight.
MM is a not a sane position int he middle of insane people.
MM is an anchor, that gets us further right, that gets us further to a free market future.
But there is anoter thing that comes after MM, and it is the kind of thing the Tamny and MF are always bitching about.
10. June 2012 at 20:31
MONEY IS NOT MADE BY GOVT.
period. the end.
IT I S NOT A SOCIAL GOOD.
Starving people NEVER MEANS print more money. People dying, suffering, eating filth, whatever Zombie nightmare you can dream up, NONE OF IT justifies “oh, now we should devalue other people’s money.
The goal of BITCOIN is a noble goal. Money that cannot be debased, money that is limited in supply, ever divisible, that make govts DIE if they are run on more than tax revenues.
—–
Now look, until such time as we can run money without govt. THEN the value of MM is ONLY and EXCLUSIVELY that it
Makes guys like John Tamny and MF a better deal than they have now.
Meaning, over 5 years, 10 years, 20 years…
MM has to GUARANTEE less inflation than the current system.
Or you don’t get to have MM!
That’s reality.
You either sell it to win over Ron Paul, and show them how it crushes the govt. on the rocks of fat public employee despair, or you won’t get what you want.
—-
Look guys, I love y’all – but this thing here, it is another card that gets played to shrink govt. OR IT DIES.
The fight isn’t fair now.
It isn’t going to ever be a fair fight.
MM is a not a sane position int he middle of insane people.
MM is an anchor, that gets us further right, that gets us further to a free market future.
But there is another thing that comes after MM, and it is the kind of thing the Tamny and MF are always bitching about.
10. June 2012 at 20:31
MONEY IS NOT MADE BY GOVT.
period. the end.
IT I S NOT A SOCIAL GOOD.
Starving people NEVER MEANS print more money. People dying, suffering, eating filth, whatever Zombie nightmare you can dream up, NONE OF IT justifies “oh, now we should devalue other people’s money.
The goal of BITCOIN is a noble goal. Money that cannot be debased, money that is limited in supply, ever divisible, that make govts DIE if they are run on more than tax revenues.
—–
Now look, until such time as we can run money without govt. THEN the value of MM is ONLY and EXCLUSIVELY that it
Makes guys like John Tamny and MF a better deal than they have now.
Meaning, over 5 years, 10 years, 20 years…
MM has to GUARANTEE less inflation than the current system.
Or you don’t get to have MM!
That’s reality.
You either sell it to win over Ron Paul, and show them how it crushes the govt. on the rocks of fat public employee despair, or you won’t get what you want.
—-
Look guys, I love y’all – but this thing here, it is another card that gets played to shrink govt. OR IT DIES.
The fight isn’t fair now.
It isn’t going to ever be a fair fight.
MM is a not a sane position int he middle of insane people.
MM is an anchor, that gets us further right, that gets us further to a free market future.
But there is another thing that comes after MM, and it is the kind of thing the Tamny and MF are always bitching about.
10. June 2012 at 20:33
To paraphrase David Ricardo, perfect money is that which doesn’t change in value, which is why markets happened upon gold as the definer.”
Look, we allhave know goldabout doesn’t meetunderstand this definition. We all know gold goes in and out of fashion, but pork bellies, they create bacon! That demand is steady and stable. Pair it with its perfect compliment, frozen orange juice. Now that’s a commodity standard!
10. June 2012 at 20:34
To paraphrase David Ricardo, perfect money is that which doesn’t change in value, which is why markets happened upon gold as the definer.”
Look, we allhave know goldabout doesn’t meetunderstand this definition. We all know gold goes in and out of fashion, but pork bellies, they create bacon! That demand is steady and stable. Pair it with its perfect compliment, frozen orange juice. Now that’s a commodity standard!
10. June 2012 at 20:37
something is wrong on the WP host.
10. June 2012 at 20:44
Tamny starts the article by noting that late in his career Friedman began to have doubts as to whether a money supply target was best. From this he inferred (I kid you not) that Milton Friedman had repudiated monetarism.
Well, in his defense, Krugman said the same thing for the same reason:
As Krugman was declaring this, Bernanke had Friedman’s “eleven principles of monetarism” on the Fed’s web site saluting the great impact of Friedman’s monetarism on modern central bank operations.
Its good to remember what a naif Krugman can be when in his know-it-all mode — a veritable Tamny — and how far he and DeLong have rowed back to have the limited degree of sympathy they now have for QE and NGDP targeting.
10. June 2012 at 20:46
Sorry about the word jumble in the first sentence. Something with the site and my phone.
10. June 2012 at 20:55
I wish I could find a keg of whatever you’re drinking, Morgan (and you are drinking, clearly). But I just don’t see small government coming, with or without MM. And I certainly don’t see the thing that comes after MM.
We’ll never get rid of protectionism.
http://marginalrevolution.com/marginalrevolution/2011/01/china-fear-of-the-day.html
We’ll never get rid of the poverty trap. http://content.ksg.harvard.edu/blog/jeff_frankels_weblog/2008/02/08/8/
And the public pension crisis will crush us.
http://www.theatlantic.com/business/archive/2010/05/public-pensions-headed-for-disaster/57103/
Even if the demographic time bomb doesn’t.
http://www.economist.com/blogs/certainideasofeurope/2008/08/body_count
Maybe we get 1.25% RGDP growth over the next 20 years, no entitlement reform, socialized medicine, green boondoggles, a rapidly aging society, and then a recession and a debt crisis and default.
None of this is really all that terrible — it’s just not nearly as good as it should be.
/drinks
10. June 2012 at 21:46
[…] Posted at 1:46 on June 11, 2012 by Mark Thoma I Ruined the Dollar – David beckworth A horrible accident – Scott Sumner A Mind Made Up – David Warsh What's wrong […]
10. June 2012 at 21:57
Tamny obviously doesn’t recognize the roots of NGDP targeting as an Austrian policy, or realize that you are an adopted Austrian.
From the recent Econtalk podcast with Larry White, after 52:00…
~~~~~
White: I would … just have a [Fed] mandate for a single nominal target. I would prefer something other than the price level. I would prefer nominal income or an index of producer prices, following Hayek, rather than consumer prices.
Roberts: … certainly Scott Sumner, who is in the Hayekian nominal income camp that you just mentioned…
White: Scott has an article entitled “The Real Problem Was Nominal,” where he thinks the reason we have a slow, slow economy is that we are not back up to the nominal income path that we were on before the financial crisis … Nominal income is currently growing at more than 5%, so Sumner’s view is that it should continue to grow at 5% per year.
I would rather see it grow at 0% per year.
Roberts: When you said 0%, you didn’t mean nominal income — you meant prices.
White: I meant nominal income.
Roberts: [… silence … dead air … long silence, “did my battery just die? did I hit ‘pause’ by accident?” long…]
Roberts: You wouldn’t want nominal income to grow at zero.
White: Why not?
Etc.
~~~~~~~~~~
So there is some disagreement at the details level even among nominal targeters.
But if Tamny knew the roots of nominal targeting, maybe he’d feel compelled to sick Mises on Hayek as a damned splitter heretic.
10. June 2012 at 21:59
Where to begin, eh?
First, compliments on the well-deserved savaging delivered to Tamny. My comments and questions should be read with that in mind.
Next, I suppose, would be the quote from The Theory of Money and Credit: Would I be misrepresenting Mises to assert that it is, effectively, an intellectual drubbing of mercantilism à la Hume’s specie-flow mechanism, and not some absolute claim about monetary equilibrium? Mises did have a fondness for rhetorically bellicose writing, writing which lends itself to grievous abuse when quoted out of context. If such is the case here, then it is another strike against Tamny. If not, then where have I erred in my reading?
Last would be a partial defense of gold bugs: How convinced should we be that leaving the gold standard was necessary to the economic performance that Eichengreen charts? I know little about the European cases, excepting Britain, but the US was quite capable of expanding the money supply, due to the massive quantities of sterilized gold in its vaults. It was the real bills doctrine that held them in thrall, was it not? To say that leaving the gold standard encouraged better monetary policy is not to say that better (or even optimal) monetary policy was unachievable whilst on the gold standard, yes? Moreover, do the more sophisticated proponents of a gold standard (e.g., Larry White) not consider the price of gold whilst on a fiat standard to be irrelevant, or even a testament to the power and efficacy of the gold standard? Is the appropriate metric for them not the stability of gold’s value under the standard, unmoved by the very forces that caused the recent volatility in the price of gold? (None of this is to ignore the numerous other forces which buffet the value of gold.)
As mentioned earlier, nothing asked should be taken as a defense of Tamny or his assertions — merely some peripheral figures and opinions.
10. June 2012 at 22:00
This article makes me go back to my standard refrain that most Austrian types just do not have honest intellectual curiosity into why unemployment happens and how, in general, actual economics works. Whatever views Tamny has on how to actually lower unemployment, a prescription for deflation and tough money just will not work. Pointing out the mountain of evidence against tough money only illicits red herrings and ad hominem attacks. Nothing in the way of real evidence for their views.
The Internet of course is full of people who believe dumb things and then use logical fallacies to defend against contradictory evidence. The real concern is that it’s not just Forbes writers or people on the Internet. People with real power, either FOMC members or influential economists, believe things that are just as wrong and, when pressured, use somewhat similar logical fallacies, although more elegantly than people wrong on the Internet. Unfortunately they also cause millions of unnecessary man-hours of idleness while those wrong on the Internet do not.
10. June 2012 at 22:47
In the spirit of finding a common ground.
Major_Freedom,
Would you support a central bank with LOLR powers which follows level targeting of NGDP if there were a 100% maturity matching banking regime (what most austrians call 100% reserve banking)?
SSumner, Would you support a zero maturity mismatch banking regime if the central bank with LOLR powers targeted NGDP level?
10. June 2012 at 22:49
MF, I didn’t know you worked for Forbes!!!
10. June 2012 at 22:49
Scott, Bryan Caplan replied to your comment on means-testing: http://econlog.econlib.org/archives/2012/06/replies_on_mean.html
10. June 2012 at 22:54
Becker and Posner on monetary policy: http://www.becker-posner-blog.com/
10. June 2012 at 22:55
MF, I didn’t know you worked for Forbes!!!
Or should I say, Major Tamny?
10. June 2012 at 23:07
Take a look at the Posner article. It’s a fascinating illustration of Posner’s newfound fascination with Dinosaur Keynesianism (and not too far from the way many others think, I’ll warrant):
A new refutation of the hot-potato effect:
Reinventing Say’s Law:
Fire away, Scott.
10. June 2012 at 23:11
Gary Becker writes:
11. June 2012 at 00:16
“No individual and no nation need fear at any time to have less money than it needs.” – Ludwig von Mises, The Theory of Money and Credit
That statement awed me. When I try to explain monetarism to people, I try to point out a drastic example where there is definitely a shortage of money. For example, I ask, is $100 enough for the US economy monetary supply? This gets people at least thinking that there maybe a shortage of money. I then move on to letting them know that it is impossible for anyone person to know how much money is absolutely necessary to produce, but if we must centrally plan the monetary supply, we may as well do it in a sensible way.
But apparently, with Mises, I wouldn’t even get past the “$100 is obviously not large enough of a monetary supply for the US economy”. Mises seems more useless than I had thought.
11. June 2012 at 00:19
@Saturos,
Articles like this are the new “in” thing among financial journalists. Let me summarize all of them for you:
“Bernanke maybe considering QE3. But rates are already so low! So QE3 will be pointless. So Bernanke better not do QE3”
Rinse, dry and repeat
11. June 2012 at 00:52
Jim Glass,
A 0% nominal income target is very different to a 5% NGDPLT.
But it’s even more different than it may appear at first glance.
Larry White wants nominal income to grow at the same rate as real labour input. (i.e. a productivity norm per Selgin: mises.org/books/less_than_zero_selgin.pdf ). This is closer to a 0% inflation target than than it is to a NGDPLT. It merely uses the average hourly wage rate, adjusted for productivity improvements, as the price measure rather than the price of a bundle of consumer goods.
These are not mere details, they are fundamental differences.
For instance, if the Fed had followed this approach over the last 20 years, interest rates would have been significantly higher, and asset bubbles and credit excesses much less likely. Whereas the approach they did follow up until the credit crunch of 2007 is very close to what Scott recommends.
11. June 2012 at 01:11
Given that monetary theory is symmetrical, if a 99% drop in the money supply has no real effects, then we also don’t need to fear hyperinflation.
What makes monetary theory “symmetrical”? It is not. Too much money has very different effects than too little money, in reference to economic wealth creation and consumption (which are a little different than “needs”.)
“No individual and no nation need fear at any time to have less money than it needs.” … for individuals, this is hyperbole, lots of individuals have overborrowed and overspent, or have made mal-investments (negative return). These folks, like Greece today, do need to fear that they may not “have enough money” to fulfill all their prior promises. (Altho too many promises is more accurate than too little money.)
But a nation that can print its own money never need to fear that there is not enough to “pay its bills”. This is true, and it is not symmetric — America could, today, print $10 tril dollars and pay off contractual obligations in dollars.
But people can, should, and do fear hyper-inflation, too much “money” that has lost its value.
Of course, for Greece, the logic of leaving the Euro is precisely because it is not such a “nation that can print its own money” right now, but if they left the Euro they would be able to, which all would expect of them, and their Drachma debts would be paid.
Zimbabwe never had less money than it needed, it had too much money of too little value. That’s not the same.
Scott, you quoted a lot, but seemed to avoid most of his real points. But ok, he’s a gold bug and you’re a fiat bug. What’s the optimal policy now?
(Ya, I agree it’s NGDP, plus tax cuts and gov’t spending cuts and more bank lending to SMBs).
11. June 2012 at 01:28
Liberal Roman,
Mises would assert, and I’d agree with him, that $100 is enough money for the U.S. economy. Obviously we’d need to break it up into much smaller units than pennies, but it’s still a basic question of price. Mises was never an advocate of monetary deflation, but he would point out that in order for deflation on a commodity standard to take place, there had to first be a big increase in the supply of unbacked currency. On a commodity currency, other economists assumed that only having money backed by the money commodity would lead to a shortage of money, which is pure nonsense.
11. June 2012 at 02:00
Saturos do you have a link for Posner/Becker by any chance?
11. June 2012 at 02:08
“The idea that increasing the supply of money must stimulate economic activity, though mistakenly thought to be an idea of Keynes’s, is actually an echo of “Say’s Law,”
It’s like one of those pictures where you have to figure out how many things are wrong I guess.
Let me see if I can guess a few things-first MMers are not like old fashioned Monetarists who target directly the money supply and second it’s not a Say’s Law argument-the argument for loose money doesn’t require Say’s Law-does it?
11. June 2012 at 02:17
Scott, you are good when you are you are angry 🙂
11. June 2012 at 02:18
Damn the iPad bounce!
11. June 2012 at 04:04
[…] Sumner rips on the terrible version of Folk Austrianism that has invaded Forbes. […]
11. June 2012 at 04:11
Heh, even Posner-Becker don’t seem to get the case for monetary easing. And yet people take such umbrage at the simple assertion that there is no consensus that monetary policy can address the present demand crisis, even among those who believe the current crisis is in part or in whole demand side.
There is no false equivalence between vulgar Austrianism and vulgar Keynesianism; both are alive and well, and deserve to be slammed, just as hard as Krugman slammed vulgar Keynesianism back in the ’90s, when he first coined the term: http://www.pkarchive.org/cranks/vulgar.html
Worth quoting Krugman against the vulgar Keynesians once more (even if his interest rates-based framework does not suffice to fully explain the current crisis to vulgar Keynesians):
11. June 2012 at 04:13
Scott, ask yourself:
– Who reads Forbes?
– Who owns Forbes?
– What are their political motivations right now?
I applaud your article, particularly the impact of symmetry on Mises, but we’re getting no traction till after the election. I’ve been resigned for 18 months or so, ever since Team Obama put getting a deeply flawed health care plan through congress over getting unemployment and monetary policy back on track.
Romney’s folks won’t make the same mistake – though they may induce a recession early in the term by being unable to back away from their current position, but you can bet that as we approach the 2014 election, there will have been significant easing.
11. June 2012 at 04:53
Okay, musings on the cause of the Great Depression:
http://socialmacro.blogspot.com/2012/06/balance-sheet-great-depression.html
11. June 2012 at 05:19
johnleemk: That Krugman quote is great and, if you substitute in Bernanke, still applies. Which is making Krugman angry, as it should.
11. June 2012 at 05:27
Cedric, Good points.
Aidan, Well it used to be respected.
dwb, It’s a puzzle.
Steve, I suppose the fish rots from . . .
dlr, Thanks for the tips.
Morgan, Sorry, I often have problems with the host.
Charlie, Those would probably do as well as gold.
Jim Glass, Yup, Krugman makes a similar mistake.
And thanks for the White quotation. I didn’t even use the term ‘Austrian’ in my post, that would have been unfair to the smart Austrians. Heck that would have even been unfair to MF!
William, I mostly agree. Much more could have been done even if they had stayed on gold–but leaving made it much easier. And relative gold price fluctuations might be less under a gold standard, but then again they might still be way too large.
Matt, See my reply to Jim Glass.
Prakesh, I’m not familiar with that banking system. The key is to reform FDIC.
Saturos, Thanks for the links. What would Milton Friedman think if he had lived to see the UC adopt “liquidity trap” macro.
Liberal Roman, In fairness, he might have been quoted out of context,
Paul, That’s exactly backward. Nominal interest rates are highly correlated with NGDP growth over the long run. If White/Selgin approach had been taken then interest would have been far lower over the past 20 years. BTW, I agree that a wage target would be superior in theory to NGDP. But I’m worried about downward wage stickiness.
Tom, You said;
“Scott, you quoted a lot, but seemed to avoid most of his real points.”
When faced with that sort of nonsense, one doesn’t look for “real points,” one simply looks for the best way to have fun mocking his post.
Thanks Lorenzo.
johnleemk, Good point.
Statsguy, You may be right, but the markets don’t see any easing for as far as the eye can see.
11. June 2012 at 05:34
Never a more true thing
“I applaud your article, particularly the impact of symmetry on Mises, but we’re getting no traction till after the election. I’ve been resigned for 18 months or so, ever since Team Obama put getting a deeply flawed health care plan through congress over getting unemployment and monetary policy back on track.
Romney’s folks won’t make the same mistake – though they may induce a recession early in the term by being unable to back away from their current position, but you can bet that as we approach the 2014 election, there will have been significant easing.”
And that Cedric is what I mean…
Scott’s bet with me hinges on whether Obama wins or loses in Nov.
IF Scott is correct, than your litany concerns bears weight, and only NGDPLT can help contain the growth of government.
BUT, if Obama loses then I am correct:
1. massive debt on things that don’t benefit Dem voters and low taxes that benefit have forever hacked the “vote to get free stuff” gambit of Democrats. Republicans never get free stuff, they PAY all the taxes.
This literally means that over a 50+ yea cycle that began in 1980, we will CODIFY into Dem voters minds that there is no payoff of free stuff to voting.
Dem Admins will either have to be Clinton and win or Obama and lose.
2. Poverty trap: we will cut back on benefits. Eventually ALL people will be moved into something very much like my Guaranteed Income plan to Auction the Unemployed:
http://pegobry.tumblr.com/post/21427545322/morgan-warstler-via-steve-randy-waldman
This is where the Tea Party is taking us. Don’t fight it.
3. Public pensions can’t touch us, we’re simply going to treat retires public employees the way WE ALL KNEW we’d treat them anyway.
You know how if the Fed doubles the money supply and everybody KNOWS it will be cut back down later, it has no effect?
Same thing with promising public employees Defined Benefit pensions.
We aren’t gong to pay the taxes for them period. So instead think $30K a year per PP max.
Hopes and dreams are dashed in the corporate world all the time, public employees will get used to it. What are they going to do, riot?
RISK can NEVER be removed from the system.
Note the awesome effect my GI plan has on public employees.
4. Old people – there is going to be an exact moment when today’s college students are tomorrow 30 year olds, and they are going to become RUTHLESS fiscal conservatives intent on ice floeing grandma.
But no worries, my GI plan works for old people too.
Cedric, the rest of the world forces the US to become more of what made her great, and FDR and LBJ didn’t contribute to that equation.
Meanwhile technology means we can run most of the government with buildings of long term staff.
Think big Cedric, my guys, the Internet crowd haven’t even gotten started on doing to Govt. what we did to business over the past 20 years.
See Space X (and Virgin) vs. NASA
11. June 2012 at 05:38
Why those who bash Obama recovery just don’t get it
http://diaryofarepublicanhater.blogspot.com/2012/06/those-who-bash-obama-recovery-just-dont.html
11. June 2012 at 06:11
This might be the most simultaneously depressing and amusing thing I’ve read in weeks…
11. June 2012 at 06:15
I thought Scott might have been a little over the top in his critique of Tamny, but then I actually read Tamny’s article on Forbes. Scott took it easy on him because that article was easily one of the worst I’ve read on monetary policy in a while–a very long while. Blech. Next time Scott, put some stank on it.
11. June 2012 at 07:07
Scott,
More evidence (in addition to what Saturos mentioned) that UC has abandoned Milton Friedman’s intellectual legacy…
I asked John Cochrane on his blog what he thought of NGDP targeting and this was his response:
Any chance you could stage a hostile takeover of the UC economics department?
11. June 2012 at 07:34
For the life of me I do not understand this fascination with excess reserves as an indicator that monetary policy must be pushing on a string. Do people really believe that the Fed could monetise the entirety of the US national debt, and the price level would not budge?
11. June 2012 at 07:37
Thanks Morgan. I share your goals, if not your optimism.
11. June 2012 at 08:03
Despite the fact John Tamny’s titles are Chief Economist and Chief Economic Adviser at his respective jobs draw the mistaken conclusion that John Tamny is in fact an economist.
His only formal training was a one quarter course in Business Economics at Vanderbilt.
But it’s exactly people like Tamny that get big soapboxes at Forbes and Real Clear Markets.
11. June 2012 at 08:04
“Despite the fact John Tamny’s titles are Chief Economist and Chief Economic Adviser at his respective jobs draw the mistaken conclusion that John Tamny is in fact an economist.”
should read
“Despite the fact John Tamny’s titles are Chief Economist and Chief Economic Adviser at his respective jobs I hope people don’t draw the mistaken conclusion that John Tamny is in fact an economist.”
11. June 2012 at 08:32
Mark,
You are letting Tamny off too easy. Evan Soltas has never taken a college level economics course either, but he is light-years ahead of Tamny in economic understanding.
11. June 2012 at 08:32
Cedric, the only real mistake made by the GOP since 1980 was allowing the public employees to gain ground.
The tax cuts should have been steeper, and far more effort should have gone into defunding the public employee unions.
It was a horrible mistake, but one that can easily be recovered from.
You can’t expect to win all the elections, but you can make sure that Dems only get to be budget fighters.
Now if Scott wins our bet, than I have been wrong since the later 1980’s, because it hinges on Obama losing since he chose to not be Clinton.
But, we had to have an Obama to test my theory, we would naturally expect the second iterative Dem game player to come to the table DETERMINED to not capitulate the way the first Dem did.
Now then, if future Dem game players all see the Dem who did not capitulate get axed and axed hard, we can expect at least the next player when Dems finally get another shot, to go the Clinton route.
This could take us 20 more years!
And during that time we can end Public Employee Unions for good and automate most of the government online.
It is very hard with this very real possibility in front of us, to put down that chance and pin our hopes on just NGDPLT.
My narrative is much more plausible and free market than Scott’s – he assume a political reality that hasn’t been true sine LBJ, and if I’m correct, than Monetary in general really just is a side car to political strategy as markets go.
11. June 2012 at 08:36
“Now if Scott wins our bet, than I have been wrong since the later 1980’s, because it hinges on Obama losing since he chose to not be Clinton.”
I like that Morgan-at least your big claims have some empirical basis to judge them by.
11. June 2012 at 10:21
Cedric:
“Money is approximately super-neutral in the long run.” – Scott Sumner, http://www.themoneyillusion.com/?p=14459
is very different than this
“No individual and no nation need fear at any time to have less money than it needs.” – Ludwig von Mises, The Theory of Money and Credit
One of them ignores base velocity; the other doesn’t. One of them says “approximately;” the other says “at any time.” Asserting that money is long run neutral is true, but it doesn’t disprove the fact that monetary stimulus moves AD.
Money is not long-run neutral. Not with one round of inflation, and especially not with repeated rounds of inflation.
Money neutrality is a myth derived from misunderstanding the praxeological nature of money. For example, the non-neutrality of money has enabled the state to grow far beyond what it could have grown in the absence of inflation. This has had such profound effects on society that we are still, for example, experiencing the after-effects of civil war financing. We are now living in a more “federal” country than otherwise would have been the case. The same goes for Europe and the Great War. Without inflation, the US would never have meddled to the extent it did in Europe, and world history would have been forever altered because of it.
The belief that money is neutral stems from an intellectually lazy way of treating money, which is derived from the mechanical version of the Quantity Theory. Money simply does not, and never has, been introduced into society in everyone’s bank accounts simultaneously and at the same rate. No, money always enters the economy at distinct points. In a division of labor economy, this has profound effects that are glossed over by sloppy price level and inflation estimations.
Prakash:
Would you support a central bank with LOLR powers which follows level targeting of NGDP if there were a 100% maturity matching banking regime (what most austrians call 100% reserve banking)?
No, because just like firm, city, and state level NGDPs would fluctuate in accordance with investor estimations of relative supply and demand conditions, so too would country level NGDPs fluctuate in accordance with investor estimations of relative supply and demand conditions. I not only see no value in overruling the results of individual investor and consumer preferences in the market, I follow Hayek and see positive damages that result from country governments and central banks unilaterally targeting domestic money and spending.
Saturos:
MF, I didn’t know you worked for Forbes!!!
Except Sumner’s analysis of it is even worse.
Liberal Roman:
“No individual and no nation need fear at any time to have less money than it needs.” – Ludwig von Mises, The Theory of Money and Credit
That statement awed me. When I try to explain monetarism to people, I try to point out a drastic example where there is definitely a shortage of money.
Guaranteed fallacy of composition in 3, 2, 1…
For example, I ask, is $100 enough for the US economy monetary supply? This gets people at least thinking that there maybe a shortage of money.
Yes, $100 is enough for the US economy money supply. Prices would be fractions of cents, but it is absolutely possible. Instead of cars costing $50,000, they would cost 0.00001 cents, or whatever.
You have to stop looking at money as a direct consumer good, rather than a medium of exchange.
It would be like asking “How can we possibly measure everything in light years? It would be impossible to measure things in terms of light years!” No, it wouldn’t be impossible. It is possible. We won’t be making possible what used to be impossible by merely introducing new length denominations of miles, yards and feet. We could have remained using light years if light years was all that was available.
You’re making the same error Krugman made when he thought the baby-sitting co-op example justified devaluing the monetary unit.
I then move on to letting them know that it is impossible for anyone person to know how much money is absolutely necessary to produce, but if we must centrally plan the monetary supply, we may as well do it in a sensible way.
And there’s the rub. You admit you have no clue what the correct money supply should be, but you believe central planners can choose a “sensible” supply. No, they cannot. The only “sensible” supply of money for the market is the supply dictated by the market process, which means integrating money production into the division of labor, into capitalism. Communism lacks a price system for the means of production, and when the means of producing money itself are monopolized by the state, then the state would lack the requisite information to know the “correct” money supply and volume of spending relative to all other goods, the same way they would lack the requisite information to know the “correct” supply of potatoes relative to all other goods if they monopolized potato production.
What you call “sensible” is at best a guess as to what the money supply would be in a free market of money production, and because it is a guess, it carries with it the potential, nay, the necessity, to blow up in your face when the results aren’t what you expected them to be.
But apparently, with Mises, I wouldn’t even get past the “$100 is obviously not large enough of a monetary supply for the US economy”. Mises seems more useless than I had thought.
Well, it’s not surprising you would consider non-communist solutions to be “useless.”
11. June 2012 at 12:41
Scott,
You said: “Paul, That’s exactly backward. Nominal interest rates are highly correlated with NGDP growth over the long run. If White/Selgin approach had been taken then interest would have been far lower over the past 20 years.”
This is what Selgin says, at http://mises.org/daily/3200 :
“Taking such a “productivity-norm” ideal into account, and referring to total factor productivity growth as shown in Chart 5, one arrives at the conclusion that the Fed ought to have begun raising the federal-funds-target-rate somewhat earlier than Taylor suggests, and far more aggressively. It follows that, in light of a productivity-norm perspective on sound monetary policy, Greenspan’s Fed may deserve, not only a large share of blame for the housing bubble but the lion’s share.”
11. June 2012 at 13:02
Breaking News! Major Freedom’s liberal cousin gets a recommended diary at daily kos.
http://www.dailykos.com/story/2012/06/11/1098890/-Krugman-vs-Keen-Rhetoric-vs-Reality
All the themes are there: paranoia of shadowy financial elites, a conspiracy of the status quo where economists get paid big money to pretend to disagree because they all know that the radical solutions are the path to righteousness . . .
11. June 2012 at 13:40
Mike Sax:
I like that Morgan-at least your big claims have some empirical basis to judge them by.
Unlike your advocacy, which prevents empirical free market data from even existing to be observed.
11. June 2012 at 13:55
Cedric:
Breaking News! Major Freedom’s liberal cousin gets a recommended diary at daily kos.
All the themes are there: paranoia of shadowy financial elites, a conspiracy of the status quo where economists get paid big money to pretend to disagree because they all know that the radical solutions are the path to righteousness
It’s not paranoia to identify non-shadowy financial elites who operate carte blanche in the open.
A conspiracy is just an agreement between persons to deceive, mislead, or defraud others. Conspiracies take place all the time, if you keep up with the news that is.
And the subtlety is obviously lost on you regarding the Fed buying off the economics profession. It’s not that the Fed pays economists to purposefully lie and deceive others. It is more like a filtration process, where economists who call for the abolition of the Fed, do not receive Fed funds and grants, and those who believe the Fed should not be abolished, only “reformed”, do receive Fed funds and grants. Over time, the result is rewarding bad economics and punishing good economics. It’s not a grand deliberate plot from start to finish by one consciousness. It’s the results of what happens when the Fed finances monetary economics. Basic, normal, well-known incentives come into play, and the resulting “research” becomes biased in favor of the Fed continuing to exist.
It would be like a large company like General Electric, hiring scientists. Over time, GE’s R&D will come to be composed of scientists who believe in the products GE is marketing. It will be highly implausible for GE’s R&D to be composed of scientists actively pursuing GE’s demise. Any scientist caught doing that, will quickly lose his job. Incentives incentives incentives.
You talk of “shadowy conspiracy theories”, when all I am doing is talking the basics of incentives and how that affects organizations and institutions.
Please at least TRY to make it appear like you grasp this.
11. June 2012 at 14:05
“Unlike your advocacy, which prevents empirical free market data from even existing to be observed.”
Major you just one Non Sequitor of the day. I’ve never said anyting even remoetly like that and if you can point to it I’d finally be impressed.
11. June 2012 at 15:13
“Unlike your advocacy, which prevents empirical free market data from even existing to be observed.”
Major you just one Non Sequitor of the day. I’ve never said anyting even remoetly like that and if you can point to it I’d finally be impressed.
Yes, you have. MANY TIMES. Every time you advocate for inflation, central banking, labor market regulations, minimum wage, corporate taxation, corporate regulations, anything and everything that is more than simply protecting private property rights and enforcing contracts, is you advocating for a world where the free market, and hence free market “data”, does not exist.
I would give you SOME range of error, for example if there was no central banking, and there was occasional financial theft and fraud of the more traditional type, then I would grant you that the data that exists is more or less a free market in money production.
But your worldview, taken together, is so far away from a free market that the data that would result cannot honestly be considered free market data.
And since that non-free market data is the only data that exists historically, I am fully justified in saying that your advocacy makes observing free market data, an impossibility.
You don’t have to actually explicitly say all this. 90% of the time when I debate people, I am debating their premises, not their claims, because it is only in premises that arguments can be right or wrong. It is like how a scientist will critique and analyse methodology of experiments more than the outcomes of experiments, because the validity of the outcomes of experiments rests entirely on the validity of the methodology.
Superficial minded people like you have to have their premises addressed, because you don’t do it yourself. I have to do it, and you ignorant say I am straw manning you, when I am really not. You’re just not understanding the consequences of what you believe.
11. June 2012 at 16:06
[…] Scott Sumner writes, […]
11. June 2012 at 17:10
Ponnuru responds to Tamny here.
http://www.nationalreview.com/corner/302448/iforbesi-vs-friedman-ramesh-ponnuru
11. June 2012 at 17:16
And Beckworth responds here.
http://macromarketmusings.blogspot.com/2012/06/i-ruined-dollar.html
11. June 2012 at 17:49
Tardney was a telemarketer for Cato before Steve Forbes took him on to peddle goldbuggism. Forbes has become a joke himself, arguing the ‘weak dollar’ caused the financial crisis. Hmmm. I thought the dollar surged during 2008. Clownshoes.
12. June 2012 at 07:54
BL, I’ll try harder next time.
SG, That won’t be easy.
Johnleemk, Unfortunately lots of people do believe that.
Mark, Normally I ignore credentials, but in this case they are revealing.
Paul, That doesn’t contradict what I said. Tight money can raises raises for a short period, but in the long run it leads to lower rates.
Tommy, Does Forbes really think the weak dollar caused the crisis?
12. June 2012 at 12:05
So, I’m something like 100 posts behind, but I feel like it’s worth picking this nit either way:
“I’m trying to unpack everything that’s wrong here, and the rest of the accompanying article. The biggest error seems to be the confusion of deflation with increased efficiency of output relative to wages. In his “deflationary” world where prices are falling, salaries are presumably the same or rising because he says that we would take our dollars saved on cheaper electronics and spend them on other things “” he doesn’t mention falling wages. Of course, if he did mention falling wages, then it would ruin his story about more money for other spending and investments “” moreover, he’d have to acknowledge how deflation prevents deleveraging.”
BOTH are deflation, unless you want to go with the pre-Keynesian definitions of inflation and deflation. The distinction you’re drawing is between deflation caused by rising productivity (a good thing) and deflation caused by a falling money supply/velocity of money (a bad thing).
The distinction ends up being pretty important because the former is a lot more common under a ‘well run’ gold standard (if such a thing is really possible — governments will be governments, after all) than the latter.
12. June 2012 at 12:34
MichaelM:
The distinction ends up being pretty important because the former is a lot more common under a ‘well run’ gold standard (if such a thing is really possible “” governments will be governments, after all) than the latter.
Don’t forget that the government depends on statist intellectuals to justify to and/or brainwash the public into accepting what the government does. Without the statist intellectuals, which includes academics, journalists, authors, and so on, the government could not exist, let alone function. There is no way that 250,000,000 million people can allow 3 million or so government employees and bureaucrats to rule them, unless they mentally sanctioned their rule. This is the function of statist intellectuals, such as Keynesians and Market Monetarists.
A free market, precious metals standard is indeed possible, but it requires, and depends on, society’s intellectuals. Without their understand and support, we will be listening to things like “It is politically unfeasible, so shut up and join us”, which is just a self-fulfilling prophecy brought about by a disposition of despair, and lack of conviction in the power of ideas, which of course ultimately derives from the population of intellectuals’ self-images.
This is why I find market monetarists such insidious intellectual parasites. They have the mental capacity to show how a free society works, and how it benefits all, but they waste their ability on being smarmy opportunists with a chip on their shoulders, as they lack the moral courage to stand up for “fringe” ideas in a world full of people who have mostly old knowledge, some of whom are juuuust getting over Marxism.
To be an intellectual is to be at the cutting edge of technology and knowledge. Market monetarism is based on ancient and hokey superstitions. Devaluing money as a de jure policy? Ancient Roman emperors tried that. Maybe we can try something a little more cutting edge and contemporary, like open market competition in money production at the individual level?
It has worked wonders for medicine, electronics, and food. Why the hang up on money? I’ll tell you, it’s because a free market in money production puts a huge barrier on state enforced wealth redistribution. Parasitic criminals can’t leech off the productive if they have to earn their money by themselves becoming productive.
By forcing the productive to use toilet paper for money, they can print all the toilet paper they want and spend it on themselves and their friends, and then they can hire intellectuals to brainwash impressionable students into believing that people are better off not when more wealth is produced, but when there is more toilet paper printed that enables parasites to consume wealth made by the productive, because of a non-existent problem of the free market process somehow failing to clear the market via supply and demand, as if people would choose death over a lower nominal income.
Then along comes market monetarists, who propose a fixed path of toilet paper exchanges, to allegedly limit the parasitism, but not destroy it. After all, how many parasites would listen to those who called for a change to protect the host from such parasitism?
12. June 2012 at 13:45
Scott,
I said: “A 0% nominal income target is very different to a 5% NGDPLT. But it’s even more different than it may appear at first glance. Larry White wants nominal income to grow at the same rate as real labour input. (i.e. a productivity norm per Selgin: mises.org/books/less_than_zero_selgin.pdf ). This is closer to a 0% inflation target than than it is to a NGDPLT. It merely uses the average hourly wage rate, adjusted for productivity improvements, as the price measure rather than the price of a bundle of consumer goods. These are not mere details, they are fundamental differences. For instance, if the Fed had followed this approach over the last 20 years, interest rates would have been significantly higher, and asset bubbles and credit excesses much less likely. Whereas the approach they did follow up until the credit crunch of 2007 is very close to what Scott recommends.”
You said: “Paul, That’s exactly backward. Nominal interest rates are highly correlated with NGDP growth over the long run. If White/Selgin approach had been taken then interest would have been far lower over the past 20 years. BTW, I agree that a wage target would be superior in theory to NGDP. But I’m worried about downward wage stickiness.”
I said: “This is what Selgin says, at http://mises.org/daily/3200 : “Taking such a “productivity-norm” ideal into account, and referring to total factor productivity growth as shown in Chart 5, one arrives at the conclusion that the Fed ought to have begun raising the federal-funds-target-rate somewhat earlier than Taylor suggests, and far more aggressively. It follows that, in light of a productivity-norm perspective on sound monetary policy, Greenspan’s Fed may deserve, not only a large share of blame for the housing bubble but the lion’s share.” ”
You said: “Paul, That doesn’t contradict what I said. Tight money can raises raises for a short period, but in the long run it leads to lower rates.”
So you agree that the Fed ought to have begun raising the federal-funds rate earlier and far more aggressively?
12. June 2012 at 14:17
ssumner:
When White says that “interest rates” would have been higher, he is referring to the fed funds rate. He is saying that if the productivity norm were the basis, rather than CPI, then the fed funds rate would have been closer to the market rate that would have been higher at the time. The fed doesn’t target the fed funds rate with thoughts of 20 years trends. They raise and lower it for the purposes of short run considerations.
But because they didn’t use productivity norm as the basis, they kept the fed funds rate too low for too long during times that the market rate would have been higher. This is what Paul is referring to.
12. June 2012 at 15:13
I like that in this discussion Major Freedom revealed that, like all orthodox conservatives, his worldview depends on a conspiracy. I wonder what his tinfoil hat looks like.
12. June 2012 at 18:41
Paul, No I don’t agree, because I favor a 5% target, not a zero percent target path. However If I’d known how badly they were going to screw up after 2008, I would have called for tighter money in 2004-06.
12. June 2012 at 23:53
Scott,
I said: “A 0% nominal income target is very different to a 5% NGDPLT. But it’s even more different than it may appear at first glance. Larry White wants nominal income to grow at the same rate as real labour input. (i.e. a productivity norm per Selgin: mises.org/books/less_than_zero_selgin.pdf ). This is closer to a 0% inflation target than than it is to a NGDPLT. It merely uses the average hourly wage rate, adjusted for productivity improvements, as the price measure rather than the price of a bundle of consumer goods. These are not mere details, they are fundamental differences. For instance, if the Fed had followed this approach over the last 20 years, interest rates would have been significantly higher, and asset bubbles and credit excesses much less likely. Whereas the approach they did follow up until the credit crunch of 2007 is very close to what Scott recommends.”
You said: “Paul, That’s exactly backward. Nominal interest rates are highly correlated with NGDP growth over the long run. If White/Selgin approach had been taken then interest would have been far lower over the past 20 years. BTW, I agree that a wage target would be superior in theory to NGDP. But I’m worried about downward wage stickiness.”
I said: “This is what Selgin says, at http://mises.org/daily/3200 : “Taking such a “productivity-norm” ideal into account, and referring to total factor productivity growth as shown in Chart 5, one arrives at the conclusion that the Fed ought to have begun raising the federal-funds-target-rate somewhat earlier than Taylor suggests, and far more aggressively. It follows that, in light of a productivity-norm perspective on sound monetary policy, Greenspan’s Fed may deserve, not only a large share of blame for the housing bubble but the lion’s share.” “
You said: “Paul, That doesn’t contradict what I said. Tight money can raises raises for a short period, but in the long run it leads to lower rates.”
Me: “So you agree that the Fed ought to have begun raising the federal-funds rate earlier and far more aggressively?”
You: “No I don’t agree, because I favor a 5% target, not a zero percent target path. However If I’d known how badly they were going to screw up after 2008, I would have called for tighter money in 2004-06.”
OK so would you agree with this? Under the Selgin/White productivity norm 0% income target, the fed funds rate would have been higher, at times, and also on average, over the last 20 years than it would have been under a 5% NGDPLT.
13. June 2012 at 18:57
Paul, Higher on occasion, but definitely much lower on average. Indeed the average rate would have been close to 0%, as in Japan.
13. June 2012 at 21:22
Scott,
I said: “A 0% nominal income target is very different to a 5% NGDPLT. But it’s even more different than it may appear at first glance. Larry White wants nominal income to grow at the same rate as real labour input. (i.e. a productivity norm per Selgin: mises.org/books/less_than_zero_selgin.pdf ). This is closer to a 0% inflation target than than it is to a NGDPLT. It merely uses the average hourly wage rate, adjusted for productivity improvements, as the price measure rather than the price of a bundle of consumer goods. These are not mere details, they are fundamental differences. For instance, if the Fed had followed this approach over the last 20 years, interest rates would have been significantly higher, and asset bubbles and credit excesses much less likely. Whereas the approach they did follow up until the credit crunch of 2007 is very close to what Scott recommends.”
You said: “Paul, That’s exactly backward. Nominal interest rates are highly correlated with NGDP growth over the long run. If White/Selgin approach had been taken then interest would have been far lower over the past 20 years. BTW, I agree that a wage target would be superior in theory to NGDP. But I’m worried about downward wage stickiness.”
I said: “This is what Selgin says, at http://mises.org/daily/3200 : “Taking such a “productivity-norm” ideal into account, and referring to total factor productivity growth as shown in Chart 5, one arrives at the conclusion that the Fed ought to have begun raising the federal-funds-target-rate somewhat earlier than Taylor suggests, and far more aggressively. It follows that, in light of a productivity-norm perspective on sound monetary policy, Greenspan’s Fed may deserve, not only a large share of blame for the housing bubble but the lion’s share.” “
You said: “Paul, That doesn’t contradict what I said. Tight money can raises raises for a short period, but in the long run it leads to lower rates.”
Me: “So you agree that the Fed ought to have begun raising the federal-funds rate earlier and far more aggressively?”
You: “No I don’t agree, because I favor a 5% target, not a zero percent target path. However If I’d known how badly they were going to screw up after 2008, I would have called for tighter money in 2004-06.”
Me: “OK so would you agree with this? Under the Selgin/White productivity norm 0% income target, the fed funds rate would have been higher, at times, and also on average, over the last 20 years than it would have been under a 5% NGDPLT.”
You: “Paul, Higher on occasion, but definitely much lower on average. Indeed the average rate would have been close to 0%, as in Japan.”
I think once the central bank starts purchasing long bonds and private assets the interbank rate is much less relevant as an indicator, so Japan post-1990 and US post-2008 are not really relevant if we are talking about the fed-funds rate as the prime instrument of policy.
It seems you agree that under the Selgin/White productivity norm 0% income target, the Fed would have increased the fed-funds rate earlier and more aggressively prior to the housing bubble, even if you think that on average the fed-funds rate would have been lower over the last 20 years.
Given that you agree that under the Selgin/White productivity norm 0% income target, the Fed would have increased the fed-funds rate earlier and more aggressively prior to the housing bubble, would you also agree that this would have reduced the severity of the bubble?
13. June 2012 at 21:50
Paul is taking this to a deeper, darker place, where the demons live, and they do not like being disturbed. But disturbed they shall be, for they have lived there long enough.
14. June 2012 at 17:57
Paul, Yes, and that would have been very good, but it still would have been a bad decision.
As an analogy, I think if the US had entered WWI in 1917 on the side of Germany, the history of the 20th century would have been far better. But I still think that would have been a bad decision given what we knew at the time.
14. June 2012 at 18:25
“I think if the US had entered WWI in 1917 on the side of Germany, the history of the 20th century would have been far better. But I still think that would have been a bad decision given what we knew at the time.”
What?! Not that it’s the main point but how would it have been better?
14. June 2012 at 19:32
Scott,
Scott,
I said: “A 0% nominal income target is very different to a 5% NGDPLT. But it’s even more different than it may appear at first glance. Larry White wants nominal income to grow at the same rate as real labour input. (i.e. a productivity norm per Selgin: mises.org/books/less_than_zero_selgin.pdf ). This is closer to a 0% inflation target than than it is to a NGDPLT. It merely uses the average hourly wage rate, adjusted for productivity improvements, as the price measure rather than the price of a bundle of consumer goods. These are not mere details, they are fundamental differences. For instance, if the Fed had followed this approach over the last 20 years, interest rates would have been significantly higher, and asset bubbles and credit excesses much less likely. Whereas the approach they did follow up until the credit crunch of 2007 is very close to what Scott recommends.”
You said: “Paul, That’s exactly backward. Nominal interest rates are highly correlated with NGDP growth over the long run. If White/Selgin approach had been taken then interest would have been far lower over the past 20 years. BTW, I agree that a wage target would be superior in theory to NGDP. But I’m worried about downward wage stickiness.”
I said: “This is what Selgin says, at http://mises.org/daily/3200 : “Taking such a “productivity-norm” ideal into account, and referring to total factor productivity growth as shown in Chart 5, one arrives at the conclusion that the Fed ought to have begun raising the federal-funds-target-rate somewhat earlier than Taylor suggests, and far more aggressively. It follows that, in light of a productivity-norm perspective on sound monetary policy, Greenspan’s Fed may deserve, not only a large share of blame for the housing bubble but the lion’s share.” “
You said: “Paul, That doesn’t contradict what I said. Tight money can raises raises for a short period, but in the long run it leads to lower rates.”
Me: “So you agree that the Fed ought to have begun raising the federal-funds rate earlier and far more aggressively?”
You: “No I don’t agree, because I favor a 5% target, not a zero percent target path. However If I’d known how badly they were going to screw up after 2008, I would have called for tighter money in 2004-06.”
Me: “OK so would you agree with this? Under the Selgin/White productivity norm 0% income target, the fed funds rate would have been higher, at times, and also on average, over the last 20 years than it would have been under a 5% NGDPLT.”
You: “Paul, Higher on occasion, but definitely much lower on average. Indeed the average rate would have been close to 0%, as in Japan.”
Me: “I think once the central bank starts purchasing long bonds and private assets the interbank rate is much less relevant as an indicator, so Japan post-1990 and US post-2008 are not really relevant if we are talking about the fed-funds rate as the prime instrument of policy. It seems you agree that under the Selgin/White productivity norm 0% income target, the Fed would have increased the fed-funds rate earlier and more aggressively prior to the housing bubble, even if you think that on average the fed-funds rate would have been lower over the last 20 years. Given that you agree that under the Selgin/White productivity norm 0% income target, the Fed would have increased the fed-funds rate earlier and more aggressively prior to the housing bubble, would you also agree that this would have reduced the severity of the bubble?”
Scott: “Yes, and that would have been very good, but it still would have been a bad decision.”
OK, so you think that under the Selgin/White productivity norm 0% income target the severity of the bubble would have been reduced relative to what would have occurred under a 5% NGDPLT. I agree – this is the point I was attempting to convey at the top of this thread.
Why do you think it would have been bad to implement that target despite the better outcome?
15. June 2012 at 12:33
Mike, I would have prevented WWII and the Holocaust.
Paul, I think it would have caused a severe recession. Policy should aim for 5% NGDP growth to avoid wild swings in the business cycle.
Sudden adoption of 0% NGDP growth after years of 5%—well how’d it work out for Japan?
Monetary policy should pay no attention to housing, BTW.
15. June 2012 at 22:11
Scott,
I said: “A 0% nominal income target is very different to a 5% NGDPLT. But it’s even more different than it may appear at first glance. Larry White wants nominal income to grow at the same rate as real labour input. (i.e. a productivity norm per Selgin: mises.org/books/less_than_zero_selgin.pdf ). This is closer to a 0% inflation target than than it is to a NGDPLT. It merely uses the average hourly wage rate, adjusted for productivity improvements, as the price measure rather than the price of a bundle of consumer goods. These are not mere details, they are fundamental differences. For instance, if the Fed had followed this approach over the last 20 years, interest rates would have been significantly higher, and asset bubbles and credit excesses much less likely. Whereas the approach they did follow up until the credit crunch of 2007 is very close to what Scott recommends.”
You said: “Paul, That’s exactly backward. Nominal interest rates are highly correlated with NGDP growth over the long run. If White/Selgin approach had been taken then interest would have been far lower over the past 20 years. BTW, I agree that a wage target would be superior in theory to NGDP. But I’m worried about downward wage stickiness.”
I said: “This is what Selgin says, at http://mises.org/daily/3200 : “Taking such a “productivity-norm” ideal into account, and referring to total factor productivity growth as shown in Chart 5, one arrives at the conclusion that the Fed ought to have begun raising the federal-funds-target-rate somewhat earlier than Taylor suggests, and far more aggressively. It follows that, in light of a productivity-norm perspective on sound monetary policy, Greenspan’s Fed may deserve, not only a large share of blame for the housing bubble but the lion’s share.” “
You said: “Paul, That doesn’t contradict what I said. Tight money can raises raises for a short period, but in the long run it leads to lower rates.”
Me: “So you agree that the Fed ought to have begun raising the federal-funds rate earlier and far more aggressively?”
You: “No I don’t agree, because I favor a 5% target, not a zero percent target path. However If I’d known how badly they were going to screw up after 2008, I would have called for tighter money in 2004-06.”
Me: “OK so would you agree with this? Under the Selgin/White productivity norm 0% income target, the fed funds rate would have been higher, at times, and also on average, over the last 20 years than it would have been under a 5% NGDPLT.”
You: “Paul, Higher on occasion, but definitely much lower on average. Indeed the average rate would have been close to 0%, as in Japan.”
Me: “I think once the central bank starts purchasing long bonds and private assets the interbank rate is much less relevant as an indicator, so Japan post-1990 and US post-2008 are not really relevant if we are talking about the fed-funds rate as the prime instrument of policy. It seems you agree that under the Selgin/White productivity norm 0% income target, the Fed would have increased the fed-funds rate earlier and more aggressively prior to the housing bubble, even if you think that on average the fed-funds rate would have been lower over the last 20 years. Given that you agree that under the Selgin/White productivity norm 0% income target, the Fed would have increased the fed-funds rate earlier and more aggressively prior to the housing bubble, would you also agree that this would have reduced the severity of the bubble?”
You: “Yes, and that would have been very good, but it still would have been a bad decision.”
Me: “OK, so you think that under the Selgin/White productivity norm 0% income target the severity of the bubble would have been reduced relative to what would have occurred under a 5% NGDPLT. I agree – this is the point I was attempting to convey at the top of this thread. Why do you think it would have been bad to implement that target despite the better outcome?”
You: “I think it would have caused a severe recession. Policy should aim for 5% NGDP growth to avoid wild swings in the business cycle. Sudden adoption of 0% NGDP growth after years of 5%””well how’d it work out for Japan? Monetary policy should pay no attention to housing, BTW.”
OK, so you think a reduction in the severity of the bubble would have been very good, but would have caused a severe recession, and therefore would have been a net bad. I presume therefore you believe that under NGDPLT there can never be a severe recession?
Japan essentially had your target outcome for years but it was not sustainable. To me it is evidence that an NGDP target is a recipe for failure, not evidence of its efficacy. What makes you think that they “adopted” 0% NGDP growth as opposed to having it imposed upon them by the collapsing credit bubble?
I presume by “Monetary policy should pay no attention to housing” you mean “transfers of existing land and houses”, as NGDP itself is around 17% housing investment and services. Whether transfers of existing land and houses should be included is an open question.
16. June 2012 at 08:04
Paul, It makes no sense to say a given NGDP growth rate is not sustainable. That would be like saying inflation is not sustainable. With fiat money you can push inflation and NGDP as high as you want for as long as you want. So I don’t understand your comment.
The Fed should ignore all components of NGDP, no matter how large, and just focus on the total.
A severe recession could occur with a severe real shock. But in my lifetime there has been no real shock strong enough to cause a severe recession, with the possible exception of 1974 (which was complicated by the removal of price controls.
The massive real estate collapse of January 2006 to April 2008 caused unemployment to rise from 4.7% to 4.9%. That’s trivial.
16. June 2012 at 21:58
Scott,
“It makes no sense to say a given NGDP growth rate is not sustainable. That would be like saying inflation is not sustainable. With fiat money you can push inflation and NGDP as high as you want for as long as you want. So I don’t understand your comment.”
So you deny the possibility that RGDP can decline with growing NGDP?
17. June 2012 at 17:16
Paul Do you really think I’m a complete moron, or are you being sarcastic? Either way, tell me why I should spend more time answering your silly questions.
17. June 2012 at 19:45
Scott,
I said: “A 0% nominal income target is very different to a 5% NGDPLT. But it’s even more different than it may appear at first glance. Larry White wants nominal income to grow at the same rate as real labour input. (i.e. a productivity norm per Selgin: mises.org/books/less_than_zero_selgin.pdf ). This is closer to a 0% inflation target than than it is to a NGDPLT. It merely uses the average hourly wage rate, adjusted for productivity improvements, as the price measure rather than the price of a bundle of consumer goods. These are not mere details, they are fundamental differences. For instance, if the Fed had followed this approach over the last 20 years, interest rates would have been significantly higher, and asset bubbles and credit excesses much less likely. Whereas the approach they did follow up until the credit crunch of 2007 is very close to what Scott recommends.”
You said: “Paul, That’s exactly backward. Nominal interest rates are highly correlated with NGDP growth over the long run. If White/Selgin approach had been taken then interest would have been far lower over the past 20 years. BTW, I agree that a wage target would be superior in theory to NGDP. But I’m worried about downward wage stickiness.”
I said: “This is what Selgin says, at http://mises.org/daily/3200 : “Taking such a “productivity-norm” ideal into account, and referring to total factor productivity growth as shown in Chart 5, one arrives at the conclusion that the Fed ought to have begun raising the federal-funds-target-rate somewhat earlier than Taylor suggests, and far more aggressively. It follows that, in light of a productivity-norm perspective on sound monetary policy, Greenspan’s Fed may deserve, not only a large share of blame for the housing bubble but the lion’s share.” “
You said: “Paul, That doesn’t contradict what I said. Tight money can raises raises for a short period, but in the long run it leads to lower rates.”
Me: “So you agree that the Fed ought to have begun raising the federal-funds rate earlier and far more aggressively?”
You: “No I don’t agree, because I favor a 5% target, not a zero percent target path. However If I’d known how badly they were going to screw up after 2008, I would have called for tighter money in 2004-06.”
Me: “OK so would you agree with this? Under the Selgin/White productivity norm 0% income target, the fed funds rate would have been higher, at times, and also on average, over the last 20 years than it would have been under a 5% NGDPLT.”
You: “Paul, Higher on occasion, but definitely much lower on average. Indeed the average rate would have been close to 0%, as in Japan.”
Me: “I think once the central bank starts purchasing long bonds and private assets the interbank rate is much less relevant as an indicator, so Japan post-1990 and US post-2008 are not really relevant if we are talking about the fed-funds rate as the prime instrument of policy. It seems you agree that under the Selgin/White productivity norm 0% income target, the Fed would have increased the fed-funds rate earlier and more aggressively prior to the housing bubble, even if you think that on average the fed-funds rate would have been lower over the last 20 years. Given that you agree that under the Selgin/White productivity norm 0% income target, the Fed would have increased the fed-funds rate earlier and more aggressively prior to the housing bubble, would you also agree that this would have reduced the severity of the bubble?”
You: “Yes, and that would have been very good, but it still would have been a bad decision.”
Me: “OK, so you think that under the Selgin/White productivity norm 0% income target the severity of the bubble would have been reduced relative to what would have occurred under a 5% NGDPLT. I agree – this is the point I was attempting to convey at the top of this thread. Why do you think it would have been bad to implement that target despite the better outcome?”
You: “I think it would have caused a severe recession. Policy should aim for 5% NGDP growth to avoid wild swings in the business cycle. Sudden adoption of 0% NGDP growth after years of 5%””well how’d it work out for Japan? Monetary policy should pay no attention to housing, BTW.”
Me: “OK, so you think a reduction in the severity of the bubble would have been very good, but would have caused a severe recession, and therefore would have been a net bad. I presume therefore you believe that under NGDPLT there can never be a severe recession? Japan essentially had your target outcome for years but it was not sustainable. To me it is evidence that an NGDP target is a recipe for failure, not evidence of its efficacy. What makes you think that they “adopted” 0% NGDP growth as opposed to having it imposed upon them by the collapsing credit bubble? I presume by “Monetary policy should pay no attention to housing” you mean “transfers of existing land and houses”, as NGDP itself is around 17% housing investment and services. Whether transfers of existing land and houses should be included is an open question.”
You: “Paul, It makes no sense to say a given NGDP growth rate is not sustainable. That would be like saying inflation is not sustainable. With fiat money you can push inflation and NGDP as high as you want for as long as you want. So I don’t understand your comment. The Fed should ignore all components of NGDP, no matter how large, and just focus on the total. A severe recession could occur with a severe real shock. But in my lifetime there has been no real shock strong enough to cause a severe recession, with the possible exception of 1974 (which was complicated by the removal of price controls. The massive real estate collapse of January 2006 to April 2008 caused unemployment to rise from 4.7% to 4.9%. That’s trivial.”
Me: “So you deny the possibility that RGDP can decline with growing NGDP?”
You: “Do you really think I’m a complete moron, or are you being sarcastic? Either way, tell me why I should spend more time answering your silly questions.”
Far from it. I’m sorry if the question seems unreasonable, it certainly is not intended sarcastically. What I mean is that it does make sense to say a given NGDP growth rate is not sustainable, if an attempt to achieve it without regard for other factors leads to a decline in RGDP. For instance, I don’t think anyone would claim that a 100% NGDP growth rate is sustainable, because an attempt to achieve that would obviously lead to adverse effects that would destroy RGDP. I am wondering whether you believe that chasing 5% NGDP growth and achieving it could ever result in a persistent decline in RGDP? You seem to think that could never happen, based on your comment “It makes no sense to say a given NGDP growth rate is not sustainable”.
18. June 2012 at 09:02
Paul, You said;
“I don’t think anyone would claim that a 100% NGDP growth rate is sustainable,”
Of course it is, both Brazil and Argentina ran roughly 75% NGDP growth, per year on average, for 30 years. More recently Turkey had a long stretch of very high NGDP growth. Why wouldn’t it be sustainable? Yes, RGDP might fall, but you can always increase P at a much faster rate than RGDP falls.
18. June 2012 at 09:03
No, I don’t think chasing 5% NGDP growth could cause a decline in RGDP.
18. June 2012 at 09:19
ssumner:
“I don’t think anyone would claim that a 100% NGDP growth rate is sustainable,”
Of course it is, both Brazil and Argentina ran roughly 75% NGDP growth, per year on average, for 30 years.
Notice how with a quick “on average”, Sumner erases all the variations in NGDP over that time span?
Both Argentina and Brazil experienced hyperinflation. It was not sustainable. That’s why Brazil adopted a new currency in 1994, and it’s why Argentina adopted a new currency in 1992.
More recently Turkey had a long stretch of very high NGDP growth. Why wouldn’t it be sustainable?
I’ve already explained this. It’s because the relative price distortions caused by monetary inflation, require accelerating money inflation in order to maintain a nice, constant, NGDP growth. Both Brazil and Argentina bear this out. Their currencies collapsed. They adopted new currencies and brought NGDP and monetary inflation back down.
Yes, RGDP might fall, but you can always increase P at a much faster rate than RGDP falls.
So we can always have no real wealth and only dollars left. Wonderful. Market monetarism in a nutshell folks.
No, I don’t think chasing 5% NGDP growth could cause a decline in RGDP.
What about an accelerating rate of growth in aggregate money supply, as is what happened in Australia 1990 to 2008?
18. June 2012 at 14:07
Scott,
I said: “A 0% nominal income target is very different to a 5% NGDPLT. But it’s even more different than it may appear at first glance. Larry White wants nominal income to grow at the same rate as real labour input. (i.e. a productivity norm per Selgin: mises.org/books/less_than_zero_selgin.pdf ). This is closer to a 0% inflation target than than it is to a NGDPLT. It merely uses the average hourly wage rate, adjusted for productivity improvements, as the price measure rather than the price of a bundle of consumer goods. These are not mere details, they are fundamental differences. For instance, if the Fed had followed this approach over the last 20 years, interest rates would have been significantly higher, and asset bubbles and credit excesses much less likely. Whereas the approach they did follow up until the credit crunch of 2007 is very close to what Scott recommends.”
You said: “Paul, That’s exactly backward. Nominal interest rates are highly correlated with NGDP growth over the long run. If White/Selgin approach had been taken then interest would have been far lower over the past 20 years. BTW, I agree that a wage target would be superior in theory to NGDP. But I’m worried about downward wage stickiness.”
I said: “This is what Selgin says, at http://mises.org/daily/3200 : “Taking such a “productivity-norm” ideal into account, and referring to total factor productivity growth as shown in Chart 5, one arrives at the conclusion that the Fed ought to have begun raising the federal-funds-target-rate somewhat earlier than Taylor suggests, and far more aggressively. It follows that, in light of a productivity-norm perspective on sound monetary policy, Greenspan’s Fed may deserve, not only a large share of blame for the housing bubble but the lion’s share.” “
You said: “Paul, That doesn’t contradict what I said. Tight money can raises raises for a short period, but in the long run it leads to lower rates.”
Me: “So you agree that the Fed ought to have begun raising the federal-funds rate earlier and far more aggressively?”
You: “No I don’t agree, because I favor a 5% target, not a zero percent target path. However If I’d known how badly they were going to screw up after 2008, I would have called for tighter money in 2004-06.”
Me: “OK so would you agree with this? Under the Selgin/White productivity norm 0% income target, the fed funds rate would have been higher, at times, and also on average, over the last 20 years than it would have been under a 5% NGDPLT.”
You: “Paul, Higher on occasion, but definitely much lower on average. Indeed the average rate would have been close to 0%, as in Japan.”
Me: “I think once the central bank starts purchasing long bonds and private assets the interbank rate is much less relevant as an indicator, so Japan post-1990 and US post-2008 are not really relevant if we are talking about the fed-funds rate as the prime instrument of policy. It seems you agree that under the Selgin/White productivity norm 0% income target, the Fed would have increased the fed-funds rate earlier and more aggressively prior to the housing bubble, even if you think that on average the fed-funds rate would have been lower over the last 20 years. Given that you agree that under the Selgin/White productivity norm 0% income target, the Fed would have increased the fed-funds rate earlier and more aggressively prior to the housing bubble, would you also agree that this would have reduced the severity of the bubble?”
You: “Yes, and that would have been very good, but it still would have been a bad decision.”
Me: “OK, so you think that under the Selgin/White productivity norm 0% income target the severity of the bubble would have been reduced relative to what would have occurred under a 5% NGDPLT. I agree – this is the point I was attempting to convey at the top of this thread. Why do you think it would have been bad to implement that target despite the better outcome?”
You: “I think it would have caused a severe recession. Policy should aim for 5% NGDP growth to avoid wild swings in the business cycle. Sudden adoption of 0% NGDP growth after years of 5%””well how’d it work out for Japan? Monetary policy should pay no attention to housing, BTW.”
Me: “OK, so you think a reduction in the severity of the bubble would have been very good, but would have caused a severe recession, and therefore would have been a net bad. I presume therefore you believe that under NGDPLT there can never be a severe recession? Japan essentially had your target outcome for years but it was not sustainable. To me it is evidence that an NGDP target is a recipe for failure, not evidence of its efficacy. What makes you think that they “adopted” 0% NGDP growth as opposed to having it imposed upon them by the collapsing credit bubble? I presume by “Monetary policy should pay no attention to housing” you mean “transfers of existing land and houses”, as NGDP itself is around 17% housing investment and services. Whether transfers of existing land and houses should be included is an open question.”
You: “Paul, It makes no sense to say a given NGDP growth rate is not sustainable. That would be like saying inflation is not sustainable. With fiat money you can push inflation and NGDP as high as you want for as long as you want. So I don’t understand your comment. The Fed should ignore all components of NGDP, no matter how large, and just focus on the total. A severe recession could occur with a severe real shock. But in my lifetime there has been no real shock strong enough to cause a severe recession, with the possible exception of 1974 (which was complicated by the removal of price controls. The massive real estate collapse of January 2006 to April 2008 caused unemployment to rise from 4.7% to 4.9%. That’s trivial.”
Me: “So you deny the possibility that RGDP can decline with growing NGDP?”
You: “Do you really think I’m a complete moron, or are you being sarcastic? Either way, tell me why I should spend more time answering your silly questions.”
Me: “Far from it. I’m sorry if the question seems unreasonable, it certainly is not intended sarcastically. What I mean is that it does make sense to say a given NGDP growth rate is not sustainable, if an attempt to achieve it without regard for other factors leads to a decline in RGDP. For instance, I don’t think anyone would claim that a 100% NGDP growth rate is sustainable, because an attempt to achieve that would obviously lead to adverse effects that would destroy RGDP. I am wondering whether you believe that chasing 5% NGDP growth and achieving it could ever result in a persistent decline in RGDP? You seem to think that could never happen, based on your comment “It makes no sense to say a given NGDP growth rate is not sustainable”.”
You: “Of course it is, both Brazil and Argentina ran roughly 75% NGDP growth, per year on average, for 30 years. More recently Turkey had a long stretch of very high NGDP growth. Why wouldn’t it be sustainable? Yes, RGDP might fall, but you can always increase P at a much faster rate than RGDP falls. No, I don’t think chasing 5% NGDP growth could cause a decline in RGDP.”
I look forward to seeing the latter opinion backed up by extensions to your model to include RGDP.
Inflation was 5000% in Argentina in 1989. In 2001 there was a currency crisis and the government defaulted on its debt. Bank accounts were frozen for twelve months. In October 2002 27.5% of the population lived in extreme poverty.
Brazil introduced a new currency in 1994, in the middle of the 30 year period you refer to, because the old currency had failed. In 2002 there was another currency crisis.
Don’t you think hyperinflations, currency crises and an outright currency failure indicate that monetary policy was unsustainable?
20. June 2012 at 07:00
Paul, I think we are just going around in circles now, so this will be my last reply here. You can bring this issue up in more recent posts. The fact that countries with hyperinflation do 1000 to 1 currency reforms doesn’t mean inflation is not sustainable, prices often begin rising again right after the reform. The reforms are done just to make the math easier for consumers, so they don’t have to deal with large numbers. But inflation can and does preceed indefinitely. The reason the extremely high rates often end at some point is that voters quite rightly prefer to avoid hyperinflation. But there are no technical problems preventing a central bank from increasing the money supply at the rate of 10% a year forever. The same applies to NGDP targeting.
20. June 2012 at 17:24
Scott,
So by “sustainable” you mean the monetary authority can always increase the money supply, even if it leads to tragedy.
You seem to use a different (and more normal) definition here: http://www.themoneyillusion.com/?p=14459
“The Austrians often complain that my 5% NGDP target proposal would lead to an unsustainable boom, and then a bust. Let me be very clear that during the interwar period this criticism would be exactly correct. A 5% NGDP growth track would have been completely unsustainable, and would have ended in tragedy. “
21. June 2012 at 00:16
ssumner:
The fact that countries with hyperinflation do 1000 to 1 currency reforms doesn’t mean inflation is not sustainable, prices often begin rising again right after the reform. The reforms are done just to make the math easier for consumers, so they don’t have to deal with large numbers.
But are they rising at the same accelerating rate as before? If they don’t, then they sacrifice NGDP. If they do, then it will again be unsustainable.
Unsustainable doesn’t mean the world ends. It means the currency collapses. They didn’t just take away zeroes. They issued a new currency.
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