Caplan bet bleg

Bryan Caplan sent me the following question:

Bill Dickens wants to bet me that looser Japanese monetary policy won’t boost Japanese NGDP.  What victory conditions should a market monetarist consider prudent and probative?

So I thought I’d see what others think.

I don’t like these sorts of bets, as I see some ambiguity here.  Is the bet over whether the BOJ will adopt easy money?  Or whether NGDP will rise if it does adopt easy money?  Given that I define easy money as rising NGDP, I think you can see my dilemma.  I’d rather we just go ahead and set up an NGDP futures market.

PS.  I seem to recall that Japan’s NGDP is now lower than 20 years ago, even though its population is higher.  But its population is now falling.  I believe Japan’s NGDP will rise at least 1% per year going forward.


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84 Responses to “Caplan bet bleg”

  1. Gravatar of W. Peden W. Peden
    19. August 2013 at 11:58

    How about thinking of this question in terms of “Will Japanese NGDP grow in such a way that they are likely to hit their inflation target?”

    So if NGDP in 2015 = 1% + trend Japanese RGDP growth, then the BoJ was able to move monetary policy in such a way as to be likely to hit its inflation target.

  2. Gravatar of TallDave TallDave
    19. August 2013 at 12:22

    What an odd statement, it’s almost like saying “I bet higher NGDP won’t result in higher NGDP.” I don’t think any economist would argue a 10% inflation target wouldn’t result in higher NGDP growth.

    Dickens must mean RGDP growth, not static NGDP, right? That’s what ultimately matters at the end of the day. Of course then you have to accept some unreliable measure of inflation…

    I think the major problem with the bet is just defining “looser Japanese monetary policy.”

  3. Gravatar of Felipe Felipe
    19. August 2013 at 12:46

    I seem to recall that Japan’s NGDP is now lower than 20 years ago, even though its population is higher.

    http://research.stlouisfed.org/fredgraph.png?g=lBv (image)
    http://research.stlouisfed.org/fred2/graph/?g=lBv (source)

    NGDP is lower, and NGDP per capita is lower too (either working pop or total pop). Too bad the NGDP data goes back only to 1994…

  4. Gravatar of marcus nunes marcus nunes
    19. August 2013 at 12:50

    Felipe
    This post shows Japan´s NGDP going back to 1980:
    http://thefaintofheart.wordpress.com/2013/04/09/japans-freddy-krueger-the-consumption-tax/

  5. Gravatar of Don Geddis Don Geddis
    19. August 2013 at 13:11

    TallDave: I don’t think so. Imagine someone with a different theory of macroeconomics, who identifies tight and loose policy with the level of interest rates, and who thinks of the concrete steppes, e.g. that the trains soon mechanism for monetary policy is that lower interest rates cause businesses to borrow and then invest more.

    Such a person would say: even if the BoJ lowers interest rates slightly (and with the ZLB there isn’t much room!), and even if they double their QE purchases (but that just swaps one financial asset for another and this accomplishes nothing), even then. Nominal GDP won’t budge.

    We surely think this macro theory is broken. But it’s a reasonable request to ask us to specify a clear bet that would show the difference.

  6. Gravatar of Don Geddis Don Geddis
    19. August 2013 at 13:15

    Autocorrect. “transmission”

  7. Gravatar of Charlie Charlie
    19. August 2013 at 13:23

    Since you really define expected NGDP as easy money, one possibility is to look at Japanese Inflation Protected Securities. Japanese inflation indexed bonds aren’t very liquid, but they seem responsive to BOJ policy (when I look on bloomberg).

  8. Gravatar of Scott Sumner Scott Sumner
    19. August 2013 at 14:49

    Talldave, No, he means NGDP. But doesn’t define easy money as fast NGDP growth.

  9. Gravatar of Felipe Felipe
    19. August 2013 at 14:56

    Given that I define easy money as rising NGDP

    But do you? The “target the forecast” meme would say that easy money is to be determined relative to the target. Given that the BOJs target is 2% inflation, then the bet would have to be in terms of the inflation expectations: will higher inflation expectations lead to rising NGDP?

    So a possible bet formulation would be: if the BOJ keeps inflation expectations near 2%[1], NGDP growth will be above 0 (the trend in the past).

    [1] The jgb bond market doesn’t expect 2%, but some surveys suggest over 2%. Which measure should be used?

  10. Gravatar of LC LC
    19. August 2013 at 15:01

    Off topic: Scott, how do you think Raghu Rajan will do as new governor of RBI? What is his veiw on monetary policy and are those appropriate for the challenges currently facing India?

  11. Gravatar of Geoff Geoff
    19. August 2013 at 15:31

    If NGDP futures were worthwhile, they’d already be bought and sold in the futures market today.

    All futures markets rely on the underlying being a valued commodity. NGDP is not a commodity. It is an accounting abstraction. You can’t buy and sell “NGDP”.

    The Fed promising interest payments on margin accounts won’t create an NGDP futures markets. All that will do is create fixed income instruments, and they will be valued by investors in accordance with that interest rate. There would be no connection between this interest rate and NGDP.

    In terms of market coordination and information, NGDP futures contracts, which are really fixed income debt contracts, would convey no information of NGDP expectations, even if investors did end up caring anything about it.

  12. Gravatar of benjamin cole benjamin cole
    19. August 2013 at 16:04

    Well, first, do not call it “easy money”. Call it a “bullish monetary posture” or “pro-growth”.

    If the BoJ sticks to a pro-growth policy, I think it will work.

  13. Gravatar of Geoff Geoff
    19. August 2013 at 16:29

    Rick Rieder, fixed income CIO of Blackrock, Inc. noted on Bloomberg TV:

    “No, we’ve been saying for a long time, QE’s too big. You’ve got to taper down QE. It’s created this tremendous distortion in interest rates. Most of the losses have come because of distortions coming out.”

  14. Gravatar of Geoff Geoff
    19. August 2013 at 16:31

    “Again, it gets to, we’ve distorted interest rates so far down, and we talk about we’re at a 170-180 ten-year. You have distorted interest rates, but what we thought was fair value, over 100 basis points.”

  15. Gravatar of Cameron Cameron
    19. August 2013 at 17:40

    How about a conditional bet based on the yen/dollar exchange rate? Something along the lines of…

    Yen/dollar avg = NGDP growth will be above x%
    100 = 1%
    110 = 1.5%
    120 = 2%
    etc.

    It’s pretty obvious that the BOJ impacts the yen/dollar so that’s a plausible measure of policy to a non Market Monetarist. If yen/dollar stays much below those numbers they didn’t try.

  16. Gravatar of BC BC
    19. August 2013 at 18:14

    “Given that I define easy money as rising NGDP, I think you can see my dilemma.”

    Actually, although I have generally found market monetarist arguments convincing, this is the part that has confused me. What is the mechanism by which the Fed can always achieve a given NGDP target? Suppose we have a market for NGDP-linked bonds, and we encounter a negative demand shock that lowers market NGDP expectations. Market participants start selling NGDP bonds, which the Fed buys (by creating reserves?). What is the transmission mechanism that guarantees that Fed bond purchases will raise market NGDP expectations towards target? Without such a mechanism, it seems like market participants could sell an infinite amount of NGDP bonds to the Fed without impacting NGDP growth or NGDP growth expectations.

    For any (finite) targeted NGDP growth, is there always a finite amount of asset purchases — whether those assets are NGDP bonds, regular treasuries, or mortgage securities — such that the Fed can achieve the NGDP target if it purchases that amount of assets?

  17. Gravatar of TallDave TallDave
    19. August 2013 at 18:55

    someone with a different theory of macroeconomics, who identifies tight and loose policy with the level of interest rates

    Imagine someone with a different theory of physics, who defines heat and cold by the amount of water a substance contains.

    Now, bet that person whether January will be hotter than July.

  18. Gravatar of TallDave TallDave
    19. August 2013 at 18:57

    Scott — But the implicit assumption is that BOJ can’t inflate — okay, okay, I guess there really are people who believe that. It seems so obviously wrong, though. Everyone acts like CB inflation targets are some sort of immutable law.

  19. Gravatar of Saturos Saturos
    19. August 2013 at 21:20

    How about going back to your earlier statement about how much of a fall in the exchange rate (which we definitely know they can control) must imply a significant boost to NGDP (say doubling the growth rate)?

  20. Gravatar of dirk dirk
    19. August 2013 at 21:43

    Scott, I’m not economist I’m no economist but I’ve bothered you here from time to time over the years as an ignorant layman.

    You define things as self-fulfilling. Well, that seems too easy, no? Isn’t that your whole game? It feels like, say, you’re coaching a football team and your goal is to score the most points. So you tell your players to score the most points. And if they don’t, you claim they didn’t carry out the plan. Then you chew them out and say they are much bigger & stronger than the other team so how did they fail to score more points? Surely it was all due to a lack of effort on their part.

    But, maybe, maybe, you underestimated the strength of the other team. Who is the other team in this analogy? I don’t know. You don’t think there IS another team. But maybe there is. Maybe the Fed can’t create enough inflation BECAUSE THERE’S ANOTHER TEAM PREVENTING IT.

    Anyway, I have no idea what I’m talking about. But that’s how I perceive it. Back to Breaking Bad now…

  21. Gravatar of W. Peden W. Peden
    19. August 2013 at 23:33

    BC,

    Assume there is a finite demand to hold cash/reserves. Any increase in the monetary base greater than that demand and which is expected to continue at least until the central bank has hit its target will lead to an increase in spending, such that the target is hit.

    So the burden of proof is on those who argue that the central bank, under some circumstances, can’t hit an NGDP target. Specifically, they have to prove that there are circumstances in which people have an infinite demand to hold cash/reserves and thus new base money is always held rather than spent.

  22. Gravatar of dlr dlr
    20. August 2013 at 04:40

    You can’t settle whether it’s possible for any human to be as awesome as Chuck Norris by betting on a Steven Seagal fight.

    I don’t see a good bet available, but I doubt the problem is usefully described as differing definitions of easy money. My guess is that the fulcrum of Dickens’ claim is that the kinds of actions that Japan’s CB is taking now or is at all likely to take as it attempts to pursue higher NGDP will not succeed. I doubt he cares whether these actions are called loose money. In other words, he is largely disputing your common claim that a typical CB who wants to raise NGDP can under their current authorized powers.

    The obvious problem with this bet is that you haven’t offered an opinion about Japan’s likely resolve toward doing what it takes to succeed — only that it could if it “wanted” to. This leaves only one real alternative for a bet: Find a set of BOJ actions that you believe would be sufficient to raise NGDP and make a bet contingent on those actions. Unfortunately, that is a lost cause since communications are such a crucial component of any discretionary monetary policy regime, and the space of possible communications is too vast to summarize in a bet.

    The bet will have to wait until you or someone you are willing to go to the mat for gets put at the head of a CB who is stuck against zero bound.

  23. Gravatar of Scott H. Scott H.
    20. August 2013 at 06:28

    Japan’s looser monetary stance does not absolutely *have* to work. Despite all the “printing money” rhetoric, all the BoJ is doing is putting reserves in Japanese banks. If the Banks don’t lend then there is no money supply growth, there is no inflation, and there is no automatic NGDP growth (all things being equal).

    So the real question isn’t “will BoJ adopt easy money?”. There is ample evidence here on this blog that Summers believes this has already happened. This issue is will the BoJ’s easy money vehicle — asset purchases — lead to a substantial boost in NGDP. The jury is definitely out on that one.

  24. Gravatar of Scott H. Scott H.
    20. August 2013 at 06:32

    Yikes! Double name typo. Sorry Scott. Won’t happen again.

  25. Gravatar of Mikio Mikio
    20. August 2013 at 07:35

    Well, I looked at the most recent Japanese *nominal* data published last week.

    In Q2/2013: NGDP growth (SAAR) picked up to 2.9%, from 2.6% in Q1/2013, 0.4% in Q4/2012 and pronounced drops in the two preceding quarters. The median gain since 1994 was just 0.3%.

    Private domestic demand (77% of NGDP) rose by 1.2%, down form 2.7% in Q1, but still very high compared to a long-term median of just 0.4%.

    Non-residential business investment growth picked up as well in nominal terms, from 0.2% to 0.9%, and a negative median value of -0.6%.

    Modest it is, but I still think it’s also too early to give the BOJ the thumps down.

    Also, this happening while companies are holding back investments as they expect new tax regime (which is said to include tax incentives for capex at home).

    I should also mention that “hot money” is being sucked out of Asia and the EM at an accelerated pace in recent months, in a kind of a mini-1997, which has put upward pressure on the yen.

  26. Gravatar of Mikio Mikio
    20. August 2013 at 07:37

    Er… thumbs down, that is. 🙂

  27. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    20. August 2013 at 07:51

    Speaking of long, thin countries;

    http://www.santiagotimes.cl/business/economy-a-trade/26614-chilean-economy-grows-41-percent-in-second-trimester

    ———-quote———-
    The growth rate for 2013 now stands at 4.3 percent “” taking into account a newly calculated 4.5 percent growth rate for 2013’s first quarter.

    Still, 2012 averaged 5.45 percent growth and it is largely seen as unlikely that Chile will maintain this standard in 2013.

    Joseph Ramos, an economics professor at the Universidad de Chile, says the country should not be satisfied with anything below a 5 percent growth rate.

    “A 4.1 growth rate is not a good growth rate,” Ramos told The Santiago Times. “The Chilean economy presumably … has the capacity to grow 5 percent per year, and if that’s not taking place, notwithstanding fairly strong investment, then something is amiss. It would call for action, rather than complacency, in my estimation.”
    ———-endquote———-

    I’d say the action ought to be to re-elect the party in power.

  28. Gravatar of TravisV TravisV
    20. August 2013 at 08:45

    I imagine a lot of commenters here will laugh at this one……

    “Socialist Delusion: France Promises Full Employment, a Third Industrial Revolution, an Affordable Housing Utopia in 10 Years”

    http://globaleconomicanalysis.blogspot.com/2013/08/socialist-delusion-france-promises-full.html

  29. Gravatar of TravisV TravisV
    20. August 2013 at 08:50

    But of course, how different are Hollande’s proposals from Stiglitz’s (see below)?

    http://blog-imfdirect.imf.org/2013/05/03/the-lessons-of-the-north-atlantic-crisis-for-economic-theory-and-policy

  30. Gravatar of Gordon Gordon
    20. August 2013 at 11:34

    This bet appears to be similar to wagering on whether a person who ups the amount of food he consumes will gain weight. There’s no way I would want to be involved in such a bet because even with the extra calories, the total supply of calories may still be below the body’s demand for calories. Also, the demand for calories can change with the increase in supply.

    If there’s no way to conveniently and continuously measure a body’s demand for calories, then there’s no way to determine if the calories supplied are sufficient for weight gain unless you increase the supply until such gain is achieved. Is this a good analogy?

  31. Gravatar of Mike Sax Mike Sax
    20. August 2013 at 11:54

    Since Roger Farmer is so worried about attribution Scott when does he give you credit for inventing the ‘Letter to Paul Krugman’ bit?

    Roger Farmer: I taught Krugman everything he knows http://diaryofarepublicanhater.blogspot.com/2013/08/roger-farmer-someone-has-very-elevated.html

  32. Gravatar of TravisV TravisV
    20. August 2013 at 13:18

    Even more “bubble” talk from our liberal president……

    Pethokoukis: “Barack Obama, America’s Austrian president”

    http://www.aei-ideas.org/2013/08/barack-obama-americas-austrian-president

  33. Gravatar of Geoff Geoff
    20. August 2013 at 16:27

    Would it be more conducive to our prosperity if [one] producer received a nominal income that is variable in accordance with their performance in the market, or a guaranteed nominal income that grows 5% per year no matter their performance?

    Would it be more conducive to our prosperity if [two] producers received a nominal income that is variable in accordance with their performance in the market, or a guaranteed nominal income that grows 5% per year no matter their performance?

    Would it be more conducive to our prosperity if [three] producers received a nominal income that is variable in accordance with their performance in the market, or a guaranteed nominal income that grows 5% per year no matter their performance?

    Would it be more conducive to our prosperity if [four] producers received a nominal income that is variable in accordance with their performance in the market, or a guaranteed nominal income that grows 5% per year no matter their performance?

    Would it be more conducive to our prosperity if [five] producers received a nominal income that is variable in accordance with their performance in the market, or a guaranteed nominal income that grows 5% per year no matter their performance?

    ….

    Would it be more conducive to our prosperity if [ten] producers received a nominal income that is variable in accordance with their performance in the market, or a guaranteed nominal income that grows 5% per year no matter their performance?

    ….

    Would it be more conducive to our prosperity if [one hundred] producers received a nominal income that is variable in accordance with their performance in the market, or a guaranteed nominal income that grows 5% per year no matter their performance?

    ….

    Would it be more conducive to our prosperity if [ten thousand] producers received a nominal income that is variable in accordance with their performance in the market, or a guaranteed nominal income that grows 5% per year no matter their performance?

    ….

    Would it be more conducive to our prosperity if [one hundred thousand] producers received a nominal income that is variable in accordance with their performance in the market, or a guaranteed nominal income that grows 5% per year no matter their performance?

    ….

    Would it be more conducive to our prosperity if [one million] producers received a nominal income that is variable in accordance with their performance in the market, or a guaranteed nominal income that grows 5% per year no matter their performance?

    ….

    Would it be more conducive to our prosperity if [ten million] producers received a nominal income that is variable in accordance with their performance in the market, or a guaranteed nominal income that grows 5% per year no matter their performance?

    ….

    Would it be more conducive to our prosperity if [one hundred million] producers received a nominal income that is variable in accordance with their performance in the market, or a guaranteed nominal income that grows 5% per year no matter their performance?

    ….

    Would it be more conducive to our prosperity if [ALL] producers received a nominal income that is variable in accordance with their performance in the market, or a guaranteed nominal income that grows 5% per year no matter their performance?

    —————————————–

    Can someone who wants to be partially enslaved by NGDPLT explain why the same answer does not apply to all of these questions, and, which two neighboring questions contain different answers?

    Please note that I will reject all claims that this is a fallacy of “argument from the beard”, since not only is this not a continuum but rather a series of independent questions, but also, and more importantly, I myself define a person with just a single hair as NOT bald.

    Any help would be appreciated.

  34. Gravatar of Edward Edward
    20. August 2013 at 17:34

    You clearly don’t understand the difference between AVERAGE nominal growth and growth at the individual level. Thats the fallacy in your very long and windy examples.

    Nobody is saying 300 million people have to see their incomes grow exactly 5% per year AS INDIVIDUALS, only in the average.

    You clearly need to go back to the drawing board. your simplistic dogmatism is pathetic in its inadequacy.

  35. Gravatar of marcus nunes marcus nunes
    20. August 2013 at 18:05

    “Would it be more conducive to our prosperity” if Geoff restrained himself to a five line paragraph comment?

  36. Gravatar of Geoff Geoff
    20. August 2013 at 18:05

    Edward:

    “You clearly don’t understand the difference between AVERAGE nominal growth and growth at the individual level. Thats the fallacy in your very long and windy examples.”

    I know the difference. Nothing I said would come even close to proving otherwise.

    And I didn’t give any “examples.” All I did was ask questions.

    “Nobody is saying 300 million people have to see their incomes grow exactly 5% per year AS INDIVIDUALS, only in the average.”

    I never claimed otherwise. I am asking a series of questions. I am asking if it is conducive to human prosperity for a particular variable to be satisfied, and why.

    “You clearly need to go back to the drawing board. your simplistic dogmatism is pathetic in its inadequacy.”

    You seem maddened by reading simple questions. Simplisitic? Dogmatism? Pathetic? Inadequate? I think you missed some adjectives there. I’m still not feeling your rage.

    Anyone actually interested in answering the questions, instead of having an intellectual meltdown like Edward?

  37. Gravatar of Geoff Geoff
    20. August 2013 at 18:06

    Marcus Nunes:

    “”Would it be more conducive to our prosperity” if Geoff restrained himself to a five line paragraph comment?”

    No.

    OK, that’s two people who’d rather bloviate and get angry than answer basic questions.

    This is hilarious.

  38. Gravatar of Edward Edward
    20. August 2013 at 21:21

    I’m not angry, I’m just amused, amused that you don’t seem tograsp simple mathematical concepts, or if you doyou’re just raising a question that is completely beside the point.

  39. Gravatar of ssumner ssumner
    20. August 2013 at 22:51

    Everyone, No time for blogging today. One quick comment. Currency depreciation is what Svensson calls a “foolproof” way to inflate. But I don’t think Dickens believes the BOJ can depreciate the currency. I am certain they could if they tried, but he may not believe that.

  40. Gravatar of mike smitka mike smitka
    21. August 2013 at 04:42

    Japanese GDP data are available from 1956 if you but go to the source, the Japanese Cabinet Office. There is a break in the series because of a transition from SNA68 to SNA93 – the US as an early adopter is idiosyncratic in its GDP calculations, though my sense is the differences are now small.

    If you look at the latest GDP deflator (2013.4-6), it’s 0.3% lower than a year ago, and 18.1% below its peak in 1994. So break the discussion down into real and deflator…

    The data: http://www.esri.cao.go.jp/jp/sna/menu.html [all data available with English headings — true for almost all Japanese statistics. only a few sites lack English-language pages / indexes to data]

    For a quick overview, the BOJ monthly statistical review is useful, the latest is here.

    http://www.boj.or.jp/en/mopo/gp_2013/gp1308b.pdf

  41. Gravatar of TravisV TravisV
    21. August 2013 at 07:39

    Some Market Monetarist really needs to go after David Rosenberg for this……

    http://finance.yahoo.com/blogs/breakout/stagflation-fed-succeeds-inflationary-target-rosenberg-115130445.html

    “we don’t have Paul Volcker, we have a Ben Bernanke-led Federal Reserve and we do not have the most anti-inflationary policy in modern history, we have the most pro-reflationary monetary policy that we’ve seen in at least seven decades.”

    “My assumption is that the Fed is ultimately going to get what it wants,” Rosenberg says, pointing out that his main concern is not with the 6.5% unemployment target, but with their inflation target. “I’ve got news for you,” he says, “a 2.5% inflation expectation is not price stability.”

    And it’s not just in the U.S. either. He says there’s been a global fundamental shift on what central banks want. Where they once sought disinflation and price stability, he says, we have the exact opposite phenomenon today.

  42. Gravatar of Barry Soetoro Barry Soetoro
    21. August 2013 at 09:37

    Gentlemen,

    Arguing about JAPAN is FUTILE. If you have a population of 100 people, 30 of which are old enough where they do not produce enough to meet their needs, and 20 of which produce absolutely nothing, that means 50 must produce enough to support all 100.

    The next year 45 support 55.

    The next year 40 support 60. You can see where Japan is going fast. No monetary or fiscal policies can force a minority of a population to support everyone else. At some point as that minority shrinks, it simply can not happen. All of the Japanese “savings” has been spent and is now retained in paper bonds which are supported by a ponzi scheme. The japanese yen will continue to slide slowly, until the next big recession in which the shizzzzz is gonna hit the fan.

  43. Gravatar of Jim Glass Jim Glass
    21. August 2013 at 09:39

    Forgive the change of topic while our host is away. From The Jeff Bevos Tattler
    ~~~~~

    Why the White House is uneasy with picking Janet Yellen as Fed chair

    Many of the economic advisers whom President Obama consults with favor Larry Summers to be the next chair of the Federal Reserve. But what is it, exactly, that they have against Janet Yellen…?

    They are big on the team player …

    Yellen has a perfectly solid relationship with Bernanke, as best as I can tell, but she’s more of her own thinker within the institution. She has spent her time as vice chairwoman urging Bernanke and her other fellow policymakers to shift policy to try to do more to combat unemployment, and thinking through ways to do just that ….

    A second, and related, reason that Yellen’s leadership style isn’t a great mesh with the Obamaites is also one of her strengths. She is always meticulously prepared, a careful and systematic thinker who chooses her words carefully.

    She is methodical, not manic. And the prevailing style of the White House insiders advising on the decision leans a bit more toward manic. Geithner, for example, jumps from meeting to meeting, from hearing to phone call, without so much as a set of talking points to work from.

    The question is how Yellin’s cautious approach would work when she is dealing with the full panoply of issues that a Fed chair must grapple with.

    Third, the president very clearly frets about the risk of financial bubbles and wants a Fed chief who will be attuned to staving them off. As David J. Lynch of Bloomberg points out, four times in five days Obama recently referred to the importance of returning to “artificial bubbles” as a means of supporting growth.

    When New York Times reporters asked the president about his thinking on the Fed choice, he said: “I want a Fed chairman that can step back and look at that objectively and say, let’s make sure that we’re growing the economy, but let’s also keep an eye on inflation. And if it starts heating up, if the markets start frothing up, let’s make sure that we’re not creating new bubbles.”

    Yellen has been at the forefront of the Fed’s thinking on how to use unconventional monetary policy to try to fight unemployment and was an architect of its strategy of using more open communications combined with bond purchases to try to spur growth.

    She says all the right things about potential bubble risks from the Fed’s easy money policies (“a significant concern that I and my colleagues take very seriously,” as she put in a March speech). But she is not particularly vocal on what those risks are and where they might be bubbling up….
    ~~~~

    Bottom line: She’s overqualified.

  44. Gravatar of W. Peden W. Peden
    21. August 2013 at 10:48

    “I want a Fed chairman that can step back and look at that objectively and say, let’s make sure that we’re growing the economy, but let’s also keep an eye on inflation. And if it starts heating up, if the markets start frothing up, let’s make sure that we’re not creating new bubbles.”

    And all with one instrument.

  45. Gravatar of TheMoneyIllusion » Where Obama went wrong TheMoneyIllusion » Where Obama went wrong
    21. August 2013 at 13:19

    […] the previous post comment section Jim Glass provided me with this quotation from President […]

  46. Gravatar of Geoff Geoff
    21. August 2013 at 14:18

    Edward:

    “I’m not angry, I’m just amused, amused that you don’t seem tograsp simple mathematical concepts, or if you doyou’re just raising a question that is completely beside the point.”

    I do grasp the difference between average and single. Again, nothing I said would even hint at me not understanding the difference. This is you just trying to evade answering these simple questions, that are obviously making you flustered.

    Your “amusement” is really nothing but your attempt to quell what seems to be a very deep anxiety and psychological discomfort.

    And there is no “point” that would overrule the validity of those questions.

    It’s obvious you either can’t answer them because your intellectually incapable, or, you have some working brain cells that would enable you to cobble together a coherent response, but the answer scares the daylights out of you.

  47. Gravatar of Edward Edward
    21. August 2013 at 14:57

    ” I am asking a series of questions. I am asking if it is conducive to human prosperity for a particular variable to be satisfied, and why?”

    The short answer to your question about peoples incomes growing at 5% per year regardless of performance being conducive to human prosperity is no, and nobody cares about your example, because thats not what anybody is advocating on this blog

  48. Gravatar of Lorenzo from Oz Lorenzo from Oz
    21. August 2013 at 15:13

    I have done a post on states as coordination mechanisms which puts the Scandinavian policy regime Scott likes mentioning from time to time in (hopefully) useful perspective:
    http://skepticlawyer.com.au/2013/08/21/states-as-coordination-problems/

    It also discusses why, according to US polling, being atheist is consistently rates as being a bigger discouragement to voting for a Presidential candidate than being gay or lesbian (and, according to a 2007 poll, being Mormon was more of negative than being black for a Presidential candidate); why unfiltered immigration causes such angst; why separatism is on the upsurge in Europe; why the UK seems to have significant supply side issues; why Australia and the US have persistently similar tax-to-GDP ratios. It suggests that the US culture wars are, in part, a product of the Great Society surge in federal spending. And so on.

    The one thing it does not discuss is monetary policy, since–as the history of 1919 to now shows–central banks can go on all sorts of frolics all on their own. The Fed (1928-32, 1968-80, 2007-?), the BoF (1928-1936), the BoJ (1991-2013?), the ECB (waiting for it to stop) … It’s a long sad list, which is why the work of this and similar blogs is so important.

  49. Gravatar of Geoff Geoff
    21. August 2013 at 15:27

    Edward:

    Well thanks for finally attempting to answer. Wasn’t so hard was it?

    “The short answer to your question about peoples incomes growing at 5% per year regardless of performance being conducive to human prosperity is no, and nobody cares about your example, because thats not what anybody is advocating on this blog”

    When you say “people’s”, to which question were you directing that answer towards? I have a series of separate questions, ranging from an individual’s income, to two people’s collective incomes, to three, and so on, up to everyone’s. These are all different questions.

    The term “peoples'” is too vague for me to know which question you are referring to.

    Also, on a side note, are you really prepared to speak on behalf of everyone like that, prior to being given permission by them? It’s disrespectful, don’t you think?

  50. Gravatar of Edward Edward
    21. August 2013 at 17:48

    it doesn’t matter if its one to 1 million people, (if you count them separately, as individuals) it isn’t a good idea to remunerate an individual or a series of individuals 5% per year regardless of whether they perform well or not .

    But if you have two people, person 1 and person 2, who earn $40,000 and $20,000 respectively their AVERAGE income is $30,000 and thats roughly what we’re targeting.

    Now extend the example to 300 million people, . It leaves an enormous scope for peoples incomes to rise separately, from 10% to 20%, to 1%, etc, based on their performance as long as it all averages out NGDP wise to 5%. So your question is irrelevant. (I apologize if it was a genuine question, I thought you were being a troll)

    As for other people, I believe other people on this blog would agree with me, Im assuming something I regard as obvious.

  51. Gravatar of Geoff Geoff
    21. August 2013 at 18:22

    “But if you have two people, person 1 and person 2, who earn $40,000 and $20,000 respectively their AVERAGE income is $30,000 and thats roughly what we’re targeting.”

    Regardless of their performance? Like, if one produced fake dog poop, and the other solar powered flashlights, or they both produced moldy cheese, then you believe it will be conducive to human prosperity for their incomes to keep growing at an “average” of $30,000?

    What about the scarce resources they are using up in the course of their activity that COULD have been BETTER used in some other fashion, but won’t be used in that fashion because they can still earn a 5% growth in income no matter what they do?

    “Now extend the example to 300 million people, . It leaves an enormous scope for peoples incomes to rise separately, from 10% to 20%, to 1%, etc, based on their performance as long as it all averages out NGDP wise to 5%. So your question is irrelevant.”

    But you still haven’t anwered them. You immediately “extended” the example to 300 million people. You said bad for one, good for 300 million. But what about two, three, ten, one hundred, etc, in between?

    Why is it bad to guarantee one individual’s income, but not bad, indeed good, to guarantee more people’s incomes?

  52. Gravatar of Edward Edward
    21. August 2013 at 18:54

    “Why is it bad to guarantee one individual’s income, but not bad, indeed good, to guarantee more people’s incomes?”

    We’re not. At least not as individuals. Again, the crucial difference is between averages and singular figures.

    “What about the scarce resources they are using up in the course of their activity that COULD have been BETTER used in some other fashion, but won’t be used in that fashion because they can still earn a 5% growth in income no matter what they do?”

    Its not “no matter what they do.” (What is the Austrian obsession with fake dog poop?) If Fred goes into a failing business his business will fail, and his income will go from $40,000 to 0. Sally can still work at a coffee shop, or selling online products, doing whatever it is she does, and gain $10,000. (That is, if Fred’s income remains at zero and he doesn’t get another job.)

  53. Gravatar of Geoff Geoff
    22. August 2013 at 03:05

    Edward:

    “Why is it bad to guarantee one individual’s income, but not bad, indeed good, to guarantee more people’s incomes?”

    “We’re not. At least not as individuals. Again, the crucial difference is between averages and singular figures.”

    Guaranteeing an average income of $40,000 for two people is not guaranteeing more than one person’s income?

    Guaranteeing a total income of $80,000 for two people, no matter what either of them are doing, that is, no matter what resources they are using up, is something you actually believe is conducive to human prosperity?

    “Its not “no matter what they do.”

    “If Fred goes into a failing business his business will fail, and his income will go from $40,000 to 0. Sally can still work at a coffee shop, or selling online products, doing whatever it is she does, and gain $10,000.”

    So no matter what Sally does, having her earn more income, due to Fred earning less income, is that conducive to human prosperity?

    I’m trying to figure out in what context a guarantee of income changes from bad, to good, using specific examples.

    You agree that guaranteeing Fred’s income is bad. OK.

    So now I am asking, suppose there is Fred and Sally. Fred’s income goes down, and Sally’s income goes up, no matter what Sally is doing. Is that prosperity generating? To guarantee Sally’s income going up no matter what she does?

  54. Gravatar of Felipe Felipe
    22. August 2013 at 07:08

    Geoff, Edward:

    The Fred/Sally problem is a wrongly stated. Remember this is macro we are talking about, where your spending is my income. In the oversimplified world where there is only Fred and Sally, if Sally earns 0, it is because Fred didn’t spend anything, which means that Sally won’t be able to buy anything from Fred, thus reducing Fred’s income to 0 too. The “macroeconomy” of FredSally has collapsed.

    Now, how does printing money ensure prosperity? Since in this oversimplified world there are no assets, it means that the vicious cycle started because Fred has become a money hoarder. If the central bank prints enough money to ensure that FredSally economy grows by 5%, then it means that Fred has (at some point) stopped hoarding money, which means that Sally no longer has a 0 income, which means that she will buy stuff from Fred, and thus Fred’s income is not 0. Prosperity has been ensured (compared to the case where no money printing was done).

  55. Gravatar of Edward Edward
    22. August 2013 at 07:17

    Felipe,

    Thanks for explaining it much better than me. I tip my virtual hat to you sir!

  56. Gravatar of Mike T Mike T
    22. August 2013 at 08:10

    Felipe,

    “If the central bank prints enough money to ensure that FredSally economy grows by 5%, then it means that Fred has (at some point) stopped hoarding money,”

    >> I don’t want to speak for Geoff here, but I think he’s on to something with this example. The question that arises is why has Fred changed from a money hoarder to a money spender in this example? Is that purely a monetary phenomenon or would it be because Sally has altered her price and/or quality of product/service such that Fred’s preferences are now being satisfied? I think Geoff is trying to tease out whether one believes the composition of spending / production matter (i.e. does it matter whether Fred is spending on fake dog poop or solar powered flashlights in terms of inducing prosperity).

    Let’s suppose that it’s true that the reason Fred is hoarding is not because Sally’s income isn’t guaranteed, but she is not producing something that Fred wants at a price he’s willing to pay. Then I suppose one could move further along Geoff’s list of questions and say that the probability increases at some point that through competition and the addition of more market participants with guaranteed nominal income, the likelihood that more producers will alter their production such that they are more aligned with consumer preferences begins increasing. Even so, the question still remains whether the composition of that increased spending / output matters, and if so, why (and at what point) is guaranteed income required to induce these compositional changes?

  57. Gravatar of TallDave TallDave
    22. August 2013 at 10:58

    Well, this is sad news.

    http://ricochet.com/main-feed/Under-Tocqueville-s-Influence-China-Chooses-Despotism

    Communist Party cadres have filled meeting halls around China to hear a somber, secretive warning issued by senior leaders. Power could escape their grip, they have been told, unless the party eradicates seven subversive currents coursing through Chinese society.

    These seven perils were enumerated in a memo, referred to as Document No. 9, that bears the unmistakable imprimatur of Xi Jinping, China’s new top leader. The first was “Western constitutional democracy”; others included promoting “universal values” of human rights, Western-inspired notions of media independence and civic participation, ardently pro-market “neo-liberalism,” and “nihilist” criticisms of the party’s traumatic past.

    Even as Mr. Xi has sought to prepare some reforms to expose China’s economy to stronger market forces, he has undertaken a “mass line” campaign to enforce party authority that goes beyond the party’s periodic calls for discipline. The internal warnings to cadres show that Mr. Xi’s confident public face has been accompanied by fears that the party is vulnerable to an economic slowdown, public anger about corruption and challenges from liberals impatient for political change.

  58. Gravatar of Geoff Geoff
    22. August 2013 at 14:40

    Felipe:

    “The Fred/Sally problem is a wrongly stated. Remember this is macro we are talking about, where your spending is my income.”

    Felipe, questions cannot be “wrongly stated” unless they are internally consistent, that is, unless they are illogical within the confines of their own meaning.

    “In the oversimplified world where there is only Fred and Sally, if Sally earns 0, it is because Fred didn’t spend anything, which means that Sally won’t be able to buy anything from Fred, thus reducing Fred’s income to 0 too. The “macroeconomy” of FredSally has collapsed.”

    I was actually referring to Fred and Sally as two people to consider, within a context of their earning of income…which of course means from other sources, namely, other individuals, which means Fred and Sally aren’t the only individuals who exist, they’re just the only individuals we’re considering.

    “Now, how does printing money ensure prosperity? Since in this oversimplified world there are no assets, it means that the vicious cycle started because Fred has become a money hoarder.”

    There is no lack of assets in my example Felipe. It’s why I kept referring to “no matter what they DO”. “Do” meaning productive activity, meaning producing goods (assets) or providing services of some kind.

    If Fred hoards money, my question is whether you believe it is conducive to prosperity to guarantee Sally’s income goes up, no matter what she is doing, namely, no matter what physical objects she brings to market, or no matter what services she is offering to market.

    “If the central bank prints enough money to ensure that FredSally economy grows by 5%, then it means that Fred has (at some point) stopped hoarding money, which means that Sally no longer has a 0 income, which means that she will buy stuff from Fred, and thus Fred’s income is not 0. Prosperity has been ensured (compared to the case where no money printing was done).”

    No matter what Fred and Sally do? No matter what they produce, you’re claiming that because there is “spending” there is ipso facto “prosperity”?

  59. Gravatar of Felipe Felipe
    22. August 2013 at 15:29

    Mike:

    Let’s suppose that it’s true that the reason Fred is hoarding is not because Sally’s income isn’t guaranteed, but she is not producing something that Fred wants at a price he’s willing to pay.

    Then the additional money will mean inflation, moving the real value of Sally’s production down. Monetary policy cannot prevent real shocks from happening (in our case, the shock is that suddenly Sally’s products are no longer as desirable). However, it can prevent a macroeconomic collapse, as described before. Real incomes have gone down at the same time nominal income has gone up.

    Geoff:

    There is no lack of assets in my example Felipe.

    I knew I was going to regret my comment about assets. It doesn’t matter if there are assets or not, because for every asset that is bought, there is a person selling the asset. If nominal spending goes down, it means that *someone* along the line is hoarding money. If I save by buying an asset, and the seller of the asset does nothing with the money, then that person has become the money hoarder.

    I was actually referring to Fred and Sally as two people to consider, within a context of their earning of income… which of course means from other sources

    Then for your question is not connected in any way with NGDP targeting, and in that case I wonder why did you bring it up.

  60. Gravatar of J J
    22. August 2013 at 15:54

    Geoff,

    I don’t know if anyone answered your initial question about your series of questions, so I am giving it a shot.

    I say that the answer to the last question is: it doesn’t matter. The answer to the first question is: nominal income should depend on performance. Somewhere in between, you hit the total population of the currency area and the answer shifts.

    For the US as a whole — leaving aside the possibility of price/wage stickiness — the level of nominal income is meaningless. The US produces some amount of real goods and services, and then those goods and services can be worth $1000 or $100 or $5. The different aggregate nominal income levels just lead to different values of a dollar.

    Yet, an individual’s nominal income only affects aggregate nominal income, and so the meaning of a given level of nominal income, marginally. If an individual’s nominal income fluctuates with performance, but aggregate nominal income remains nearly fixed, then the fraction of total real US goods and services that the individual can consume fluctuates one-for-one with that individual’s nominal income and so fluctuates with that individual’s performance.

    We can choose any aggregate nominal income level or growth path and individual nominal incomes will fluctuate around a fraction of the aggregate level. Then, each individual has the same incentives to produce regardless of the value of aggregate nominal income.

  61. Gravatar of Geoff Geoff
    22. August 2013 at 16:52

    Felipe:

    “I knew I was going to regret my comment about assets. It doesn’t matter if there are assets or not, because for every asset that is bought, there is a person selling the asset. If nominal spending goes down, it means that *someone* along the line is hoarding money. If I save by buying an asset, and the seller of the asset does nothing with the money, then that person has become the money hoarder.”

    You make it sound like holding a sum of money is inherently problematic…

    Like, she is wearing the scarlett letter. He is the bad one…

    “Then for your question is not connected in any way with NGDP targeting, and in that case I wonder why did you bring it up.”

    Why do all questions have to be “connected to NGDP”?

    At any rate, these questions are connected to NGDP. It’s where the whole average of $40,000 income” comes in. But this is all besides the questions I am asking.

    The question I am asking is this: IF Fred’s income goes down, then because NGDPLT calls for Sally’s income to go up, then is it conducive to prosperity for this to occur, no matter what Sally is doing?

    After all, NGDPLT doesn’t call for spending on goods of a specific type or character. It calls for spending on goods and services regardless of what they are.

  62. Gravatar of Geoff Geoff
    22. August 2013 at 16:56

    J:

    “I don’t know if anyone answered your initial question about your series of questions, so I am giving it a shot.”

    Thanks.

    “I say that the answer to the last question is: it doesn’t matter. The answer to the first question is: nominal income should depend on performance. Somewhere in between, you hit the total population of the currency area and the answer shifts.”

    Where/when/at what point does it shift, and why?

    “For the US as a whole “” leaving aside the possibility of price/wage stickiness “” the level of nominal income is meaningless. The US produces some amount of real goods and services, and then those goods and services can be worth $1000 or $100 or $5. The different aggregate nominal income levels just lead to different values of a dollar.”

    How about the in between? How about in between one individual having a guaranteed average income of $40,000, to many people having an average guaranteed income of $40,000?

    “Yet, an individual’s nominal income only affects aggregate nominal income, and so the meaning of a given level of nominal income, marginally. If an individual’s nominal income fluctuates with performance, but aggregate nominal income remains nearly fixed, then the fraction of total real US goods and services that the individual can consume fluctuates one-for-one with that individual’s nominal income and so fluctuates with that individual’s performance.”

    What if everyone’s performance is “bad”? Should there still be a guaranteed nominal income?

    “We can choose any aggregate nominal income level or growth path and individual nominal incomes will fluctuate around a fraction of the aggregate level. Then, each individual has the same incentives to produce regardless of the value of aggregate nominal income.”

    I don’t believe incentives are sufficient.

  63. Gravatar of Geoff Geoff
    22. August 2013 at 16:58

    Mike T:

    “I don’t want to speak for Geoff here, but I think he’s on to something with this example. The question that arises is why has Fred changed from a money hoarder to a money spender in this example? Is that purely a monetary phenomenon or would it be because Sally has altered her price and/or quality of product/service such that Fred’s preferences are now being satisfied? I think Geoff is trying to tease out whether one believes the composition of spending / production matter (i.e. does it matter whether Fred is spending on fake dog poop or solar powered flashlights in terms of inducing prosperity).”

    “Let’s suppose that it’s true that the reason Fred is hoarding is not because Sally’s income isn’t guaranteed, but she is not producing something that Fred wants at a price he’s willing to pay. Then I suppose one could move further along Geoff’s list of questions and say that the probability increases at some point that through competition and the addition of more market participants with guaranteed nominal income, the likelihood that more producers will alter their production such that they are more aligned with consumer preferences begins increasing. Even so, the question still remains whether the composition of that increased spending / output matters, and if so, why (and at what point) is guaranteed income required to induce these compositional changes?”

    Bingo. Thank you for explaining better what I am having difficulty explicating clearly.

  64. Gravatar of Mike T Mike T
    22. August 2013 at 19:53

    Felipe,

    Thanks for your response.

    “Monetary policy cannot prevent real shocks from happening (in our case, the shock is that suddenly Sally’s products are no longer as desirable).”
    >> Ok, but to get back to my original questions, does it matter why Sally’s products are less desirable? Suppose Sally is owner of Sally’s Pub and has been meeting Fred’s demand for vodka & clubs a few days a week. Fred is expecting his first newborn soon and gradually decreases patronizing Sally’s Pub and eventually stops altogether as he’s now shifted his demand toward buying baby bottles and pampers. Demand for Sally’s products drops by Fred’s $X because of a shift in his consumption habits and a decrease in total spending by .7($X) as his risk tolerance has also dropped due to his increased responsibilities reflected by a desire to increase savings.

    Prior to Fred’s shift in consumption, let’s assume NGDP growth was exactly on target at 5%.

    1. In Geoff’s first question, Sally’s nominal income growth slows from 5% to 4%. How does additional money pushing Sally’s nominal income growth back to 5% solve this “problem?” More specifically, how should Sally react to this new information: Fred’s changed consumption habits and the additional money created?

    2. In Geoff’s second question, Maggie is introduced as the baby bottle and pampers provider. As a result of Fred’s shift in consumption habits, Maggie’s nominal income grows to 5.7%. With Sally’s drop to 4% growth, total income is now growing at 4.85%. How does additional money pushing Sally’s and Maggie’s average nominal income growth to 5% solve this “problem?” Again, what signals are being sent to each producer? Furthermore, the added inflation raises the price of baby bottles and pampers. Why should Fred have his purchasing power reduced because of this new money when all he did was merely shift his preferences?

    3. Assume no new money is introduced in example #2. Instead, Sally decreases her purchase of vodka and club by Fred’s $X and Maggie increases her purchase of baby bottles and pampers by .7($X). Real resources are shifted according to these demand shifts throughout the capital goods sector such that more resources are allocated toward baby bottle and pamper production and less toward vodka and club production. Fred’s utility is maximized as his preferences are being satisfied. What problem do you see in this scenario?

    In short, if the ultimate goal in society is for each individual to maximize his/her own utility according to their own unique value scales, what does 5% NGDP growth really matter? How do you connect 5% NGDP growth (or whatever arbitrary target rate) back to the actual well-being of individuals? Fred’s changes in consumption habits will be reflected in price changes reflecting the supply / demand shifts. Demand can be assumed away. It will never approach zero (i.e. macroeconomic collapse). People will always desire to eat, drink, play, purchase baby bottles and pampers. To me, it seems more important that these price changes and the signals they send are unhampered to most accurately reflect the real subjective desires of individuals such that producers can make appropriate adjustments, rather than ignoring individual preferences and subsidizing an arbitrary nominal income growth rate irregardless of who is selling what to whom.

    Apologies if I’m not addressing your comment adequately and perhaps I’m missing something here, but there’s something in a monetary regime of NGDP targeting that just doesn’t have the explanatory power to convince me.

  65. Gravatar of Felipe Felipe
    23. August 2013 at 06:28

    This is going on for too long.

    How do you connect 5% NGDP growth (or whatever arbitrary target rate) back to the actual well-being of individuals? Fred’s changes in consumption habits will be reflected in price changes reflecting the supply / demand shifts. Demand can be assumed away.

    Without stable NGDP growth, demand cannot be assumed away. When NGDP drops, demand has dropped. The price shift is a red herring, since the point of aggregate targeting is that relative prices still get determined by the market, even when the price level isn’t (as in IT) or NGDP isn’t (in NGDPLT).

    You make it sound like holding a sum of money is inherently problematic

    No, it is the decreased level of nominal spending associated with hoarding money that is problematic.

    The question I am asking is this: IF Fred’s income goes down, then because NGDPLT calls for Sally’s income to go up, then is it conducive to prosperity for this to occur, no matter what Sally is doing?

    Aggregate FredSally income must continue to go up at the 5% rate. Under NGDP targeting, if Fred’s produce is no longer wanted by others (but Sally’s continues as before), keeping aggregate spending on target means that the FredSally currency drops, causing Fred’s real income to decrease. Because Sally’s produce is still desired abroad, it’s price in terms of FredSally currency will rise, thus elevating her nominal income. Her real income has not changed, however. We cannot say what will happen to Fred’s nominal income.

  66. Gravatar of J J
    23. August 2013 at 10:33

    Geoff,

    I have been thinking about this since last night and I see that your point is more clever than I initially thought :).

    Aggregate nominal income must depend on aggregate effort. But, the baseline can change. A concrete example: consider an economy with a nominal income of $100 in year 0. The central bank announces a nominal income level target of $100.

    Workers know that the target growth rate is 0%, so they expect 0% personal nominal income growth if personal performance is ‘average’, above 0% personal nominal income growth if personal performance is ‘above average’, and so on.

    Suppose workers expect average real growth to be 3%. Then, knowing that the central bank is acting to keep expected nominal income at $100, workers expect 3% deflation. As such, ‘average’ personal performance is defined by 3% more personal real output because if personal nominal income remains constant, then, due to deflation, real income rises by 3%.

    Now, you are definitely right that, if average real output rises by more than 3% — maybe average performance is above average — then nominal income will be higher than $100. Suppose it is $110 in year 1.

    The central bank, in accordance with its level target of $100, acts to lower aggregate nominal income in year 2. Workers, as in year 1, expect aggregate nominal income to be $100 and so given real growth expectations of perhaps 4%, they expect deflation of about 13.34% (the amount of deflation necessary if real income increases by 4% but nominal income falls to $100). In year 2, ‘average’ personal performance is defined by 4% more personal real output (instead of 3% as in year 1), but ‘average’ personal performance leads to a 9.34% decline in nominal income, not a 0% change as in year 1. As in year 1, personal real income (through changes in personal nominal income) moves one-for-one with personal real output, so the right incentives are in place.

    Ultimately, the central bank always acts, in accordance with real growth expectations, to push aggregate nominal income to $100. Aggregate nominal income will fluctuate from year to year because average personal performance will never be exactly ‘average’. Nonetheless, the expected aggregate nominal income will always be $100 (a nominal income level target) and nominal income (for one person, two people, three people, or even the whole population) will always fluctuate with performance.

  67. Gravatar of J J
    23. August 2013 at 10:36

    By the way, Geoff, thanks for making me think about that more. You definitely added value with your post!!

  68. Gravatar of Mike T Mike T
    23. August 2013 at 13:23

    Felipe,

    Why is the ideal goal a nominal 5% growth target rate and not one where producers are best meeting consumer preferences regardless of the growth rate? I still don’t know what the MM answer is to that question.

    All I see are non sequiturs and assuming your own conclusions (e.g. (a) NGDP is not 5%; therefore, it’s bad, (b) hoarding is not a problem, but less aggregate spending is a problem (even though increased hoarding or saving means there’s less spending), (c) demand can only be assumed away if NGDP growth is stable and not falling (the point about assuming demand away is that human beings derive direct utility from consumption; not from hoarding or saving; thus, the natural desire of human beings is to consume not hoard))

    It seems that NGDP targeting is predicated on taking for granted a whole bunch of assumptions:
    if we have a government granted monopoly producer of money, and
    if we have a central bank with authority for discretionary monetary policy, and
    if they have to target something, and
    if we don’t care about individual time and value scale preferences (or the belief NGDP accurately captures this), and
    if we don’t care about the composition of spending / output (or the belief NGDP accurately captures this), and
    if it’s optimal to only care about aggregate spending / output, and
    if money injections don’t benefit some at the expense of others, and
    if the optimal trend in NGDP growth is 5%, then
    the optimal solution is a 5% NGDP target growth rate!

  69. Gravatar of Daniel Daniel
    23. August 2013 at 14:36

    Mike T,

    You might have of this

    http://en.wikipedia.org/wiki/Sticky_%28economics%29

    If not … well, that’s your starting point.

  70. Gravatar of Daniel Daniel
    23. August 2013 at 14:43

    Anybody who says idiocies like “demand can be assumed away” is completely unqualified to comment on macro-economics.

  71. Gravatar of Major_Freedom Major_Freedom
    23. August 2013 at 15:47

    “Anybody who says idiocies like “demand can be assumed away” is completely unqualified to comment on macro-economics.”

    Depends on what meaning you attach to “assume demand away.”

    Since money is a commodity, since it is an economic good, we can treat real goods and the money good as goods as such, and every economic principle that is apodictic in this context, would be true for cases of treating money as “nominal”, that is, something distinct from real goods.

    —————

    Now, those who believes a particular artificially created (i.e. non-market created) nominal demand is sufficient for economic growth, given the rest of the economy is “free”, such that they concentrate on nominal interpretations of economic events, are just as wrong as those who ignore money altogether.

  72. Gravatar of Geoff Geoff
    23. August 2013 at 16:17

    Felipe:

    “Without stable NGDP growth, demand cannot be assumed away. When NGDP drops, demand has dropped. The price shift is a red herring, since the point of aggregate targeting is that relative prices still get determined by the market, even when the price level isn’t (as in IT) or NGDP isn’t (in NGDPLT).”

    Felipe, inflation does not only affect aggregate spending and aggregate price levels. It affects relative spending and relative price levels.

    It is impossible for relative prices to be set PURELY by “the market” in a context of a rigid, regulatory monopoly consisting of special interest groups.

    If the central bank expands the money supply, such that the banking system experiences an increase in purchasing power (“swapping” treasuries for reserves is an increase in purchasing power), and the banks then spend or lend that money, then yes, one could say that aggregate spending has changed, but relative spending has also changed. It is this relative spending change that actually ends up being the dominant force in the allocation of capital given finite alternative investment opportunities.

    “You make it sound like holding a sum of money is inherently problematic”

    “No, it is the decreased level of nominal spending associated with hoarding money that is problematic.”

    For who? It can’t be problematic for everyone, since the people who CHOOSE to change their spending/hoarding ratios must be doing so because it benefits them. You can’t claim it doesn’t benefit them when they are choosing to do so willingly. It would be like you engaging in some voluntary activity that you want to do, and then I simply declare no, it’s not good for you. But that is just an implicit claim that value is objective, that there is some objective value that is being violated if someone spends/hoards in a ratio different from what they did prior.

    “The question I am asking is this: IF Fred’s income goes down, then because NGDPLT calls for Sally’s income to go up, then is it conducive to prosperity for this to occur, no matter what Sally is doing?”

    “Aggregate FredSally income must continue to go up at the 5% rate. Under NGDP targeting, if Fred’s produce is no longer wanted by others (but Sally’s continues as before), keeping aggregate spending on target means that the FredSally currency drops, causing Fred’s real income to decrease. Because Sally’s produce is still desired abroad, it’s price in terms of FredSally currency will rise, thus elevating her nominal income. Her real income has not changed, however. We cannot say what will happen to Fred’s nominal income.”

    Why does Sally’s income have to rise, and does the rise in her income, due to nothing but Fred experiencing a decreased income, conducive to prosperity? If Sally’s income did not rise in absolute terms, her income would still rise in relative terms compared to Fred. Why does her relative income have to rise even more with NGDPLT, no matter what she does? And if she doesn’t produce well, why do yet still others have to experience a rise in income no matter what they do?

    If you can see the pattern here, what you are saying is that while you will grant that producing garbage warrants a reduced nominal income, you will keep implicitly depending on unstated individuals experiencing an equivalent rise in nominal income (plus 5%).

    Why does Fred’s real income have to fall even more than what would transpire with a simple reduction in nominal income and no fixed growth NGDPLT, but a fluctuating one?

    Why should people who did nothing differently, experience a rise in nominal income, just because someone else experienced a reduced income? By what connection between Sally and Fred does the one’s income have to rise if the other’s falls?

    Suppose you and I and someone else are the only three market actors in the world. Suppose there is a fourth who prints money. Suppose your income falls. Why does my income have to rise as a result? What benefit is there for me to receive an increased income for doing nothing other than living near a person, you, who experienced a decline in income?

    Why shouldn’t other country’s income rise when our income falls? Why do other American income have to rise? And what difference does it make to our prosperity?

    ————————-

    J:

    “I have been thinking about this since last night and I see that your point is more clever than I initially thought :).”

    Just you wait.

    “Aggregate nominal income must depend on aggregate effort.”

    According to sound economic principles, yes, that’s true. If there is a 100 person economy, and those 100 people make mistakes, then why shouldn’t all 100 people experience a decline in income? What other way is there to effectively compel a change of behavior? An unobservable decline in standard of living, i.e. a smaller standard of living relative to what would otherwise have been the case in a different world with higher standards of living? People can’t change their behavior rationally according to that.

    “But, the baseline can change. A concrete example…”

    I think you’re conflating nominal with real. If real output rises, it does not necessarily follow that aggregate nominal income must rise. Only if there is more money and spending will aggregate spending rise. But the central bank controls that. So I don’t see why the central bank has to “act to reduce spending in year 2” as a result of changed productivity.

    J:

    “By the way, Geoff, thanks for making me think about that more. You definitely added value with your post!!”

    Well, since value is subjective, the value you are referring to us yours. Not denigrating it or anything…

    ————————-

    Mike T:

    Good post.

  73. Gravatar of Mike T Mike T
    23. August 2013 at 18:43

    Daniel,

    “You might have of this
    http://en.wikipedia.org/wiki/Sticky_%28economics%29
    If not … well, that’s your starting point…
    completely unqualified to comment on macro-economics.”
    >> I’m not commenting on “sticky economics” or “macro-economics.” I’m commenting on economics.

    “Anybody who says idiocies”
    >> That’s not nice.

    “..like “demand can be assumed away”
    >> In the context of my comment: “the point about assuming demand away is that human beings derive direct utility from consumption; not from hoarding or saving; thus, the natural desire of human beings is to consume not hoard”

    Now, are you ready to actually address any of my arguments or questions directly?

  74. Gravatar of Mike sax Mike sax
    23. August 2013 at 21:13

    “Since money is a commodity, since it is an economic good, we can treat real goods and the money good as goods as such, and every economic principle that is apodictic in this context, would be true for cases of treating money as “nominal”, that is, something distinct from real goods.”

    Assuming something that is far from universally agreed on-many would certainly not agree that money is a commodity like any other. In fact money is not a commodity. It has no value outside its use of a medium of account, a medium of exchange and store of value.

    In the days of the gold standard-or bimetallic standard, silver standard, etc.-this point was obscured as gold was also a commodity. But not in its role as money. What gives money value is not its status as a useful commodity.

  75. Gravatar of Daniel Daniel
    24. August 2013 at 02:43

    Mike T,

    Debating “austrians” is as useful as debating creationist – that is to say, not at all.

    Aggregate demand simply CANNOT BE ASSUMED AWAY because “stickiness” will always be with us.

    As such, there are no arguments/questions to address – only red herrings.

  76. Gravatar of Mike T Mike T
    24. August 2013 at 10:39

    “Debating “austrians” is as useful as debating creationist – that is to say, not at all.”
    >> So are you admitting to just trolling then?

    “Aggregate demand simply CANNOT BE ASSUMED AWAY because “stickiness” will always be with us.”
    >> 1. Where did I write about aggregate demand being assumed away? For the third time, I wrote: “the point about assuming demand away is that human beings derive direct utility from consumption; not from hoarding or saving; thus, the natural desire of human beings is to consume not hoard.” That is, demand in the context of the individual, can be assumed away. Nobody hoards/saves 100% of their income. People desire food, shelter, transportation, entertainment, etc. In this context, that is an apodictic claim. You disagree?
    2. Don’t you find it ironic that I put forth explanations why there are more optimal goals than nominal aggregate income targeting, while you refuse to address them and deflect back toward aggregate demand as the holy attainment of economic progress without explaining why or directly addressing my criticisms, and then accuse others of creationism?
    3. If I decide I want to spend x% of my income, such that nominal income growth is below some arbitrary rate, why do you insist that I must spend more against my desire to do so?

  77. Gravatar of Mike T Mike T
    24. August 2013 at 11:41

    Daniel,

    And if you are simply claiming “price stickiness,” then I think there’s an implicit obligation to also address the main causal factors of price rigidity.

  78. Gravatar of Geoff Geoff
    24. August 2013 at 15:24

    Mike Sax:

    “Assuming something that is far from universally agreed on-many would certainly not agree that money is a commodity like any other. In fact money is not a commodity. It has no value outside its use of a medium of account, a medium of exchange and store of value.”

    Mike, you obviously have no idea what a “commodity” even means. Commodities INCLUDE any scarce resource that is economized. To say that money has no value outside of its “medium of account” or “medium of exchange” or “store of value” is to concede money is a commodity.

    The phrase “just like any other” is misleading, because it makes no explicit mention of precisely what predicate is implied or thought of by the person making that statement. At one extreme, no two distinct objects separated by spacetime are “exactly” alike. But there are identical predicates of distinct objects, for example a housecat and a tiger are distinct objects, but they are both exactly “cats”, one of their predicates.

    Money is a commodity exactly like bread is a commodity because it is a scarce economic resource that individual humans act upon, for either direct or indirect utility.

    It is irrelevant what the “consensus” is regarding money and the concept “commodity”. Consensuses can be, and have been, dead wrong. It cannot possibly constitute a rational standard of truth and validity.

    “In the days of the gold standard-or bimetallic standard, silver standard, etc.-this point was obscured as gold was also a commodity. But not in its role as money. What gives money value is not its status as a useful commodity.”

    Wrong. Money is indeed “useful”, and because it is a scarce economic good, it is also a commodity, hence money is a useful commodity, although “useful” is superfluous, since the concept “commodity” presupposes usefulness.

    You could not be more wrong about money and the fact that it is a commodity. All money is at the end of the day is the most marketable economic good the providers of which are in competition with the sellers of every other good. Money is just the term we use to refer to that economic good that “wins” the competition for marketability, for exchanging. This of course leads to that economic good being the most marketable to having the highest, “indirect” exchange value.

    You have no ground to stand on to claim that money is not a commodity. All you did in your response was to commit ad populum, then outright deny it is a commodity, and then claim that identifying it as a commodity has some silly connection to past commodities used as money, as if the fact that it has since become monopolized that economic laws of action suddenly disappear.

    You need to be educated on the economics of money, and economics in general. Your knowledge is sorely lacking.

  79. Gravatar of Geoff Geoff
    24. August 2013 at 15:28

    Mike Sax:

    I challenge you to provide a definition of “commodity” that does not include money, and does not exclude commodities such as stocks, machines, factories and other “indirect” utility goods that are not directly consumed.

    Good luck. I bet you have never even thought in your mind any definition of “commodity.”

  80. Gravatar of Geoff Geoff
    24. August 2013 at 15:31

    Daniel:

    “Debating “austrians” is as useful as debating creationist – that is to say, not at all.”

    I guess you have shown everyone what it might feel like for a drunken high school drop out to debate a PhD mathematician on differential equations.

    Just some advice, if you feel inadequate, if you feel inferior, trying to bring your superiors down below your level isn’t going to bring you up in any absolute sense.

  81. Gravatar of Daniel Daniel
    25. August 2013 at 01:48

    Mike T,

    You do realize that one’s man spending is another man’s income ?

    If everybody decides to hoard money, then national income will fall. And since there will always be stickiness, that will cause unemployment.

    I don’t understand why you keep dancing around this issue.

    And nobody said 5% nominal growth is ideal. It just happened to be the path of nominal growth over the “great moderation”.

    Geoff,

    Try harder.

  82. Gravatar of Daniel Daniel
    25. August 2013 at 02:21

    Oh yeah, and good luck trying to abolish nominal rigidities.

    Lemme guess, it’s all the fault of the evil gubmint, right ?

  83. Gravatar of Geoff Geoff
    26. August 2013 at 16:08

    Daniel:

    “Try harder.”

    Don’t need to. The bare minimum is sufficient to deal with the problems in your posts.

    “If everybody decides to hoard money, then national income will fall. And since there will always be stickiness, that will cause unemployment.”

    If everyone decides to hoard money, then there must be a very good reason for that, other than what you may believe, such as “teh evil market”.

    If everyone hoards, then that means there has to be some serious changes made to the structure of the economy. Changes require temporary employment.

    Once these changes are made, there is no further need for everyone to hoard money.

    There is no justification for initiation coercion in the form of monopolistic money and banking to deal with this social issue. Especially when it is precisely the monopoly that caused the massive rise in unemployment.

    You can point to every reason under the Sun for why someone would lose work temporarily, but unless you can show the reason to be coercion itself, there is no justification for introducing it.

    “I don’t understand why you keep dancing around this issue.”

    You don’t seem to realize that you are dancing around the issue of justified use of force, and the distortionary effects of central banking on the market, especially the labor market.

    To you it’s all the evil market’s fault, and mommy and daddy “gubmint” (to use your phraseology) must save all the children.

    It probably makes you very mad to have this pointed out to you.

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