Baum and Horwitz on NGDP targeting

Here’s Caroline Baum on NGDP targeting:

Think how much simpler it would be to adopt a nominal GDP target, which encompasses real GDP plus inflation. That’s what the Fed cares about. It even incorporates the Fed’s dual mandate of stable prices and full employment. (The road to full employment goes through strong growth.) It’s a lot better than the current mishmash of a threshold for unemployment, an inflation forecast (the Fed’s), and a market-based indicator of inflation expectations.

Targeting NGDP

A nominal GDP target might not have prevented the housing bubble, but it would have mitigated the fallout from the collapse, according to market monetarists, a group of economists who advocate an NGDP target. If the Fed had made it clear it would keep nominal income on a steady path — if it had applied “whatever it takes” to an explicit goal — it could have gotten a bigger bang for its buck, or a higher turnover rate (velocity) for each dollar of quantitative easing, according to Scott Sumner, a professor of economics at Bentley University in Waltham, Massachusetts.

“With more effective monetary policy, the Fed could do less,” Sumner said during a panel discussion March 22 at the American Enterprise Institute in Washington.

No rule is perfect or can replace the gold standard of rules, which happens to be the gold standard, with its convertibility of a dollar into gold at a fixed price. Still, with the Fed’s balance sheet at $3.2 trillion and counting, and unwinding those purchases as the next hurdle, policy makers might find themselves wishing they had heeded Sumner’s claim that less is more.

And here’s Steven Horwitz:

First, NGDP targeting is superior to price-level or inflation-rate targeting because it takes account of changes in real growth by using NGDP rather than just the price level. In that way, it is much closer to monetary equilibrium, although most defenders of NGDP targeting would want to target a growth rate in NGDP, while monetary equilibrium, strictly speaking, would mean targeting a value of NGDP. Offsetting changes in money demand with changes in the supply would lead to a constant NGDP. In either case, however, both price-level and real-growth changes are accounted for.

Second, if the central bank can successfully target NGDP (which is not clear), it will accomplish the same goal as a free banking system would. If free banking is politically challenging, then NGDP targeting might be a more feasible alternative. Again, the argument that NGDP targeting is more politically feasible than free banking presumes that NGDP targeting is workable. Critics of NGDP targeting, including many who would defend free banking, argue that the same sorts of knowledge and incentive problems that plague more discretionary forms of monetary policy would make it hard for central banks to target NGDP successfully. Can central bankers collect the requisite information (or set up the right institutions) and will they stick to that policy in the face of the temptation to deviate for political gain? Even with those concerns, it is worth asking whether NGDP targeting, though not ideal in the way that free banking would be, is still a significant improvement over both the current policy regime and the first two alternatives presented here.

I’m not convinced that free banking would stabilize NGDP, but it’s good to see support for NGDP targeting in the free banking community.

BTW, Here’s Jim Pethokoukis of the AEI:

In doing this, the BofJ is belatedly following the 1990s advice of Milton Friedman who urged the nation’s central bank to boost the money supply by buying government bonds on the open market. “Higher monetary growth will have the same effect as always,” Friedman wrote. “ After a year or so, the economy will expand more rapidly; output will grow, and after another delay, inflation will increase moderately.”

Will this new policy really work? Economist Scott Sumner says it already has:

The stock market actually rose over 4% on the news, as it was down sharply right before the announcement. And of course the decision was widely expected, so the market response merely reflects the extent to which the bond purchase was larger than expected. It makes more sense to look at the stock market reaction since Abe first stunned the markets with a 2% inflation target proposal, while running for office in mid-November 2012. The Japanese stock market is up 45% since that announcement. The yen is down roughly 20%. … More proof that fiat money central banks are never “trapped” by anything other than their timidity.

Andy Mukherjee of Reuters Breakingviews suggests the BofJ get even more aggressive:

Now that he has embraced Prime Minister Shinzo Abe’s anti-deflation mandate, Kuroda must stand ready to do more. His new strategy is hyper-aggressive by Japanese standards, but the U.S. Federal Reserve’s balance sheet has tripled since the 2008 collapse of Lehman Brothers. Kuroda could resurrect equity-buying, which the BOJ experimented with in 2002 and 2009.

Advanced economies “” at least the US and Japan “” are finally figuring this thing out by rediscovering Friedman. (Lars Christensen says the ECB should “just copy-paste today’s BoJ statement.”)

I agree with Mukherjee.  This has certainly helped, but Japan is in so deep that they need to do more.  The Wicksellian real equilibrium rate in Japan is now so low that even with 2% inflation it’s quite likely that nominal rates will stay at zero.  The Japanese government has been giving free gifts to its creditors for the past 20 years.  Crazy.  Lars is also exactly right.

The economics profession has been slow to realize that we are in a new world of low nominal interest rates.  And I’m afraid that my fellow right-of-center economists have been among the slowest to understand this.


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30 Responses to “Baum and Horwitz on NGDP targeting”

  1. Gravatar of Geoff Geoff
    4. April 2013 at 08:55

    “Second, if the central bank can successfully target NGDP (which is not clear), it will accomplish the same goal as a free banking system would.”

    This is incorrect. There is no overall, aggregate, eye in the sky, central “goal” of free banking. Free banking is not meant to ensure that aggregates are all nice and stable. Free banking is meant to ensure that money production is constrained to profit and loss in a context of respect for private property rights. In other words, open competition in money, with zero government privileges ranging from privileged currency legal tender laws to privileged currency taxation laws that exclude real competition in money.

    Perhaps Horowitz is suggesting that NGDP targeting would have the same empirical outcome, for NGDP specifically, as would free banking? If that is what he means, then that is not correct either, because central banks cannot know, if they’re targeting NGDP via inflation, what NGDP would have otherwise been had banking been free instead.

    Most important of all, what Horowitz completely overlooks, since his mind is seemingly completely dominated by (what I regard as crude) aggregated thinking, is that not all equal NGDPS are equal in terms of distribution. It is one thing to raise NGDP by somehow bringing about exactly equal increases in every individual’s spending at the same time at the same rate. It is quite another thing to raise NGDP through engaging in OMOs with a particular group of people only, and then have NGDP rise disjointedly individual to individual, and thus industrial sector to industrial sector, and thus having a much more significant effect on real activity in the relative sense due to all of what most economists misleadingly label “imperfections” in market activity.

    Joe Sixpack doesn’t know what Bernanke did yesterday with OMOs with the primary dealers. But Joe Sixpack would know if Bernanke send him a check, along with everyone else, with the goal of raising NGDP that way. THIS is the main reason there are “miscalculation” with inflation as it currently stands. This miscalculation is why there is a boom bust cycle.

  2. Gravatar of Geoff Geoff
    4. April 2013 at 09:06

    If banking were free, and NGDP became as historically volatile as it was for example in the 1950s, then investors and wage earners would come to adapt to such volatility.

    They will LEARN.

    MM theory on the other hand doesn’t seem to leave any room for such learning. It holds wage earners and employers set wages in a way that can only be regarded as “automatic”, and that volatile NGDP will bring about unemployment. But wages are “sticky” today precisely because people learn. They have to learn and adapt to more or less constant price inflation from the day they’re born to the day they die. This adaptation doesn’t even need to be fully understood by everyone who has adapted to it. Just like people almost unconsciously expect the weather to cool down in December and heat up in August, so too do they come to expect rising prices all the time.

    Well, who says that is what people will think about in free banking? It is very likely, if not certain, that free banking will be a part of falling prices, in the historical sense. Real goods production would likely outrun money production. As a result, prices will generally fall year to year.

    Well, in that case, who would deny that people won’t learn and adapt to this? If every wage earner expected their wage rates to gradually fall every year, as more laborers come into the workforce, then wouldn’t they be more “open” to decreasing their wage rate ask prices if that year’s money production is less than “normal” or less than expected? Wouldn’t wage rates become far less “sticky downward”, because there is no longer inflation that makes prices rise every year for people’s entire lifetimes?

    MM theory, and Horowitz’ theory, don’t seem to be willing to accept the likelihood that wages are sticky downwards precisely because of the very inflation they believe can solve problems caused by sticky wages that they regard as some sort of market failure!

  3. Gravatar of nickik nickik
    4. April 2013 at 09:58

    I think Free Banking would not exactly be 0% NGDP target but it would work just as well or better. Im not sure how one can prove that since it depends on to many things.

    However I would rather have the uncertainty of a Free Banking System then then the current montary system.

  4. Gravatar of JimP JimP
    4. April 2013 at 10:05

    http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/9970294/Helicopter-QE-will-never-be-reversed.html

  5. Gravatar of nickik nickik
    4. April 2013 at 10:26

    @Groff

    > If every wage earner expected their wage rates to gradually fall every year

    Why? In a growing economy wages should rise with time, or in the case of mild deflation stay as it is.

    There will always be some industrys that have above avg. growth and those that dont grow at all. I see no problem.

    It might also be the case that wages become less sticky because employers can not just stop raising wages to cut there cost, as they shuld with inflation targeting.

  6. Gravatar of Geoff Geoff
    4. April 2013 at 10:54

    nickik:

    “If every wage earner expected their wage rates to gradually fall every year…”

    “Why? In a growing economy wages should rise with time, or in the case of mild deflation stay as it is.”

    Continue on in the same sentence you quoted of me. I said

    “…, as more laborers come into the workforce.”

    The initial “If” means it is not necessarily going to take place. What I have in mind here is the possibility that the rate of money production with free banking will be outstripped by the production of real goods and increase in labor supply such that selling prices (and costs!) fall over time.

    Now, if the increase in labor supply is not outstripped by the increase in money, such that wage rates remain stable for long stretches of time, then I think it would still be the case that because selling prices of goods would likely fall over time, that wage earners and employers would be far more open to reduce wage rates if there is an unexpected change in the production of free banking money.

    However my position is that money production under free banking would be far more stable than it is with our significant fractional reserve, fiat inflation system, that seems to generate rather large credit booms that I regard as destructive.

    On a different note, I would recommend that you don’t conflate growing economies with growing money supplies and volumes of spending. Just because an economy is growing in real terms, it doesn’t mean nominal incomes will, or must, keep growing as well. Aggregate money supplies and volumes of spending are determined by money production, not real goods production (although in a (laissez faire) gold standard they would be related, since more machines and factories (capital) per unit labor, allows for more gold to be mined per unit labor).

    “There will always be some industrys that have above avg. growth and those that dont grow at all. I see no problem.”

    I don’t either.

    “It might also be the case that wages become less sticky because employers can not just stop raising wages to cut there cost, as they shuld with inflation targeting.”

    Perhaps.

  7. Gravatar of Geoff Geoff
    4. April 2013 at 10:56

    nickik:

    “However I would rather have the uncertainty of a Free Banking System then then the current montary system.”

    Those who value private property rights, voluntary exchange and economic freedom would rather have that too! Now if we can just get self-described “I heart the free market” economists on board…

  8. Gravatar of TallDave TallDave
    4. April 2013 at 11:03

    And I’m afraid that my fellow right-of-center economists have been among the slowest to understand this.

    Sadly true. And unfortunately getting fiscal right and monetary wrong is worse than getting monetary right and fiscal wrong, which is where much of the left is.

  9. Gravatar of Caroline Baum swells the ranks of MMs | Historinhas Caroline Baum swells the ranks of MMs | Historinhas
    4. April 2013 at 11:22

    […] Scott Sumner is […]

  10. Gravatar of TallDave TallDave
    4. April 2013 at 11:24

    Geoff,

    Adding income-receiving laborers increases demand, too. The real question is what happens to overall productivity, because adding more productive workers to an economy actually increases overall incomes — e.g., China’s entry into the world markets created some downward pressure on incomes elsewhere, but also much larger upward pressure on incomes in China. Since the Industrial Revolution the controlling factor behind personal income growth has been productivity increases (overall, not just worker). Employers seek to maximize profit, but they have to compete with each other, and they struggle against a falling marginal propensity to work as incomes rise.

    It’s probably important to keep in mind that monetary policy is basically fiddling around the edges of the above.

  11. Gravatar of Michael Michael
    4. April 2013 at 12:08

    Hmm, did Geoff just rip Steve Horwitz for “crude aggregated thinking”?

  12. Gravatar of Geoff Geoff
    4. April 2013 at 12:17

    TallDave:

    “Adding income-receiving laborers increases demand, too.”

    Not if the additional income receiving laborers is associated with a significantly decreased income per laborer. But I will agree with you about this relation in certain scenarios, such as the depths of a depression, where plenty of potential investments are withheld, awaiting wage rates to fall, which once made, can actually lead to a higher overall demand for labor, even with a lower wage rate per laborer.

    “The real question is what happens to overall productivity, because adding more productive workers to an economy actually increases overall incomes “” e.g., China’s entry into the world markets created some downward pressure on incomes elsewhere, but also much larger upward pressure on incomes in China.”

    If by “income” you mean real income, that is, output, then I agree.

    “Since the Industrial Revolution the controlling factor behind personal income growth has been productivity increases (overall, not just worker). Employers seek to maximize profit, but they have to compete with each other, and they struggle against a falling marginal propensity to work as incomes rise.”

    With the exception of interpreting the value of leisure as a “struggle”, I’m inclined to agree.

    “It’s probably important to keep in mind that monetary policy is basically fiddling around the edges of the above.”

    That may be the intention, but there is a lot more then fiddling in terms of the effects within the structure of the economy.

    Michael:

    “Hmm, did Geoff just rip Steve Horwitz for “crude aggregated thinking”?”

    I consider it more of a ripping of (bad) ideas.

  13. Gravatar of Greg Hill Greg Hill
    4. April 2013 at 13:17

    Not sure I’d get very excited about the endorsement of NGDP targeting by someone who thinks returning to the gold standard would be even better (Ms. Baum) and by someone else who thinks free banking would achieve the same end (Mr. Horwitz). It’s one thing to count allies, it’s quite another to count allies whose views on related matters are rather wacky.

  14. Gravatar of Geoff Geoff
    4. April 2013 at 13:35

    Every new idea is perceived at first as “wacky” by the general population. Not sure how advertising yourself as outside the range of new ideas is something worse pursuing.

  15. Gravatar of TravisV TravisV
    4. April 2013 at 14:37

    Janet Yellen gave a magnificent speech on the importance of communication in monetary policy:

    http://www.businessinsider.com/janet-yellen-on-fed-communication-2013-4

  16. Gravatar of Ben J Ben J
    4. April 2013 at 15:53

    Geoff, we know our views are correct a priori, you’ll need to use something other than evidence or theory to contradict our claims.

  17. Gravatar of nickik nickik
    4. April 2013 at 16:01

    @Greg Hill

    > allies whose views on related matters are rather wacky.

    Both grow out off the idea of neutral money. The ideas have a common orgin, a lot of Market Montarists actually like Free Banking and are quite ‘Austrian’ if you want to call it that, Lars Christensen and David Beckworth for example.

    The idea that you should have a montary system that ajusts for the money supply based on demand for money, is common to Market Montarist and Free Bankers.

    The gold standard, at least in combination with Free Banking is also quite close to the same idea. The Reserve does not really matter as long as it is fixed in size gold, goverment fiat reserves or bitcoin.

  18. Gravatar of ssumner ssumner
    4. April 2013 at 17:01

    JimP, His columns are always interesting.

    Greg, I doubt Baum favors going back to the gold standard, she’s a monetarist.

    TravisV, What is the highlight?

  19. Gravatar of Liberal Roman Liberal Roman
    4. April 2013 at 17:08

    Here is a headline that SCREAMS for a Scott Sumner rant:

    “Bank of Japan 2% Inflation Goal Is Unrealistic, Gross Says”

    http://www.bloomberg.com/news/2013-04-04/bank-of-japan-stimulus-will-boost-treasuries-buying-gross-says.html

    Have at it Scott.

  20. Gravatar of xtophr xtophr
    4. April 2013 at 18:20

    Scott,

    Goggle Reader is dying. Your default beige Blogger site looks like shit. Take warning.

    -X

  21. Gravatar of Greg Hill Greg Hill
    4. April 2013 at 18:44

    Geoff

    “Every new idea is perceived at first as ‘wacky’ by the general population.”

    Unfortunately, neither the gold standard nor free banking is a new idea.

    nickik

    I don’t see the common pool of ideas that informs NGDP targeting, free banking, and the gold standard. NGDP targeting depends on the good judgment of a few public officials, whereas neither free banking nor the gold standard grants this kind of power to a centralized government agency.

    Scott

    While Ms. Baum may, or may not, want to “return” to the gold standard, she did say (from your post above), “No rule is perfect or can replace the gold standard of rules, which happens to be the gold standard, with its convertibility of a dollar into gold at a fixed price.”

    I think many commenters besides me would be interested in your view of the theoretical commonalities, if any, among NGDP targeting, the gold standard, and free banking.

  22. Gravatar of Geoff Geoff
    4. April 2013 at 18:54

    Ben J:

    “Geoff, we know our views are correct a priori, you’ll need to use something other than evidence or theory to contradict our claims.”

    That would have been funny had it not been ridiculously dishonest.

    At any rate, superior theory is what corrects bad a priori analysis, so it’s not actually correct to say that something other than theory can critique it. ONLY theory can critique it. But thanks for trying. Maybe next time you’re sarcastic, you’ll at least get the facts right.

    ————–

    Greg:

    “Geoff

    “Unfortunately, neither the gold standard nor free banking is a new idea.”

    Free banking is a newer idea than governmental manipulation of currency through debasement. The Roman Emporeror Dioclitean debased the coinage in 300 AD to finance his lavish lifestyle and starting wars.

    Laissez-faire economics, of which free banking is derived is a little more recent than that.

  23. Gravatar of Benjamin Cole Benjamin Cole
    4. April 2013 at 19:26

    Excellent blogging.

    BTW, Forbes recently ran a piece saying the BoJ was going into QE in a way that would make Bernanke blush.

    If so, Japan may be an interesting test case.

    And a snipe: I always said the right-wing would embrace MM after the election, and they are beginning to.

  24. Gravatar of Ben J Ben J
    4. April 2013 at 20:13

    Geoff,

    “At any rate, superior theory is what corrects bad a priori analysis, so it’s not actually correct to say that something other than theory can critique it. ONLY theory can critique it. But thanks for trying. Maybe next time you’re sarcastic, you’ll at least get the facts right.”

    This would be correct, if it weren’t a priori incorrect. Shame, really.

  25. Gravatar of Geoff Geoff
    4. April 2013 at 20:27

    Ben J:

    You’re not very good at trolling, Ben J.

  26. Gravatar of Ben J Ben J
    4. April 2013 at 22:27

    Geoff,

    I yield to the master.

  27. Gravatar of Geoff Geoff
    4. April 2013 at 22:38

    Keep those standards high and classy.

  28. Gravatar of ssumner ssumner
    5. April 2013 at 10:36

    Liberal Roman, Of course the “unrealistic” part is silly, but I do agree that the yen will have to depreciate even more. If it doesn’t go well over 100, they won’t make 2% in my view.

    xtophr, What is Google Reader?

    Greg , Yes, that was an odd comment. I think she meant ideal in the sense of clarity, or persistence, but am not sure. NGDP futures targeting is like the gold standard, but with NGDP futures contracts replacing gold. You could add on free banking if you want to.

  29. Gravatar of TallDave TallDave
    5. April 2013 at 11:05

    Not if the additional income receiving laborers is associated with a significantly decreased income per laborer.

    Yes, even then — demand can increase even as average incomes fall, if workers are being added. That’s why I say one should really look at overall productivity to see what’s happening. It’s very hard for living standards to drop when productivity is rising, irrespective of what happens with median income (see, for example, the United States over the past few decades).

    But I think there’s larger problems with deflationary expectations: they create ZLB issues for investors and they change incentives for consumers, such that economic activity is reduced.

  30. Gravatar of TallDave TallDave
    5. April 2013 at 12:47

    Also, the struggle for employers isn’t leisure, it’s satiety.

    As productivity rises and the welfare state grows more generous, there’s less and less reason to work — the poorest decile in the U.S. today lives better than the median person in the U.S. did in the 1950s, who in turn lived better than 90% of people in the entire span of history up to 1890 or so.

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