Carney to the rescue?

The British media is full of rumors about the Wednesday policy announcement from the BoE.  Here’s the FT:

More revolutionary still would be if the MPC used guidance to weaken the BoE’s focus on targeting inflation, a cornerstone of economic policy-making since the early nineties. “Formal inflation targeting is dead,” Sir John Gieve, a former deputy governor at the BoE, said last Tuesday at an event organised by Fathom Consulting. “There’s quite a strong case for making the conditioning variable [for deciding when to raise interest rates] not CPI inflation but average earnings growth.”

And here’s the Telegraph:

If the economy did quickly pick up speed, “you could see a policy change next year” on either interest rates or quantitative easing, he said. Sir John controversially argued that the “days of pure inflation targeting are dead” as the Bank has been focusing on wages and average earnings growth.

I’ve always thought wage targeting was superior to NGDP targeting, but that it was politically difficult to implement and wages are hard to measure.  Maybe I was wrong about the politics.  More recently I’ve become interested in targeting aggregate wages and salaries, which is sort of half way between an average hourly wage target and NGDP.  It’s also more politically acceptable than hourly wages.

Should be an interesting week.

HT:  James


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28 Responses to “Carney to the rescue?”

  1. Gravatar of Benjamin Cole Benjamin Cole
    4. August 2013 at 18:06

    How interesting that some central bankers are at long last losing their squeamish aversion—their peevish fixation really—to even microscopic rates of inflation.

    The bad news is that maybe this aversion is still strong on this side of the Atlantic.

    Paul Volcker recently penned a piece for the NY Review of Books suggesting the Fed be independent, have more regulatory powers and dump the dual mandate—so that its only obligation is to price stability.

    And if the Fed has it wing-tipped show firmly planted on the economy’s neck, cutting off the monetary air supply?

    Then what?

  2. Gravatar of benfitzg benfitzg
    4. August 2013 at 18:06

    “More revolutionary still would be if the MPC used guidance to weaken the BoE’s focus on targeting inflation”

    What is the difference between:

    1. Informal soft default by setting an inflation target and missing it every month for years in a row and each time saying “we will hit it soon”

    2. Declaring you are going to weaken the focus on targeting inflation

    How much weaker do you want the focus to be? Would you like the BoE to forget to go to the press conference because they are all playing golf? Really – define weaker focus relative to missing the inflation target for *years*.

  3. Gravatar of Ashok Rao Ashok Rao
    4. August 2013 at 18:09

    Wage increases are more consistent with changes in unemployment than nominal income increases.

    My only question is how wage targeting works with a structurally falling labor share of income.

    Of course, even nominal income targeting is prone to shifts in aggregate supply, but wage targeting is more sensitive to shifts within.

  4. Gravatar of Geoff Geoff
    4. August 2013 at 18:40

    Can someone explain to me the payoff from advocating what is “politically palatable” versus what is “just and moral”?

    I don’t see what’s wrong with always advocating for what is just and moral, regardless of the politics.

    Do you win something if you end up having advocated for what is actually politically imposed? As far as I can see, the payoff to someone who advocated for what ended up being politically imposed is exactly equal to the payoff of not advocating for it.

    Suppose the Fed started to do NGDPLT tomorrow. Would any of us benefit more for having advocated for NGDPLT, as compared to if we all advocated against it but the Fed did NGDPLT anyway?

    If the answer is “It’s not so much about standing to benefit from being an advocate of what ends up being politically imposed, but rather, it is to spread a certain set of knowledge among the populace, which then encourages the government to act in accordance with those ideas.”

    If that is the reason, then why not advocate for what is just and moral? Why not spread those ideas? If spreading certain ideas really does affect what the government does, then there is no good reason not to advocate for what is just and moral, because advocating any ideas will affect what the government does.

    If the entire population wanted to abolish the Fed for example, due to the fact that all serious intellectuals were in favor of it, due to the fact that they spread those ideas to their students, and those students to their students, and so on, and outward to the media, art, and literature, then the Fed has no chance to continue in existence.

    So what is the problem here? If the response to the above is that we won’t be able to convince enough serious intellectuals to end the Fed, then the problem really isn’t a stubborn government. It’s the intellectuals.

    Rather than reading what is and is not (allegedly) “politically palatable”, I think we should be reading instead what Dr. Sumner thinks of serious intellectuals, and what is “intellectually palatable”.

    So the question is really this: What is wrong with going intellectually against serious intellectuals, who are the ultimate reason why politics is what it is in the first place?

  5. Gravatar of Geoff Geoff
    4. August 2013 at 19:51

    Ashok:

    “Wage increases are more consistent with changes in unemployment than nominal income increases.”

    Agreed. I will add that NGDP, because it is logically a posteriori to wage payments, is (in part) a result, a consequence, of spending out of prior wage payments.

    NGDP is not synonymous with wage payments, does not drive wage payments, and cannot be said to “provide” demand for labor in any sense.

    Inflation actually works primarily through initial net investment (since a great bulk of what the Fed prints, is held by the banks and used as a reserve for credit expansion, and credit expansion primarily goes to lending to business firms which increases nominal spending on capital goods and labor.

    If NGDP should change, it will be due primarily to changed investment.

    The question no MM is addressing is why, in 2008, did so many business firms cut back on investment at the same time, which then had the consequence of a subsequent decline in NGDP.

    It’s not a valid answer to respond with “Because the Fed did not print enough money in time.” That just begs the question, of why the Fed had to print that much more money in the first place to reverse what was going on in the market.

    So why was there such a large decline in spending in the market, that required the Fed to print more money to reverse?

    Crickets…

  6. Gravatar of Daniel Daniel
    5. August 2013 at 00:09

    Geoff

    I use a megaphone to shout from the street corner

    You do realize that’s pretty much what you’re doing around here, right ?

    Nobody takes you seriously – and yet you keep coming back spouting Austrian dogma.

    Why ?

  7. Gravatar of Britmouse Britmouse
    5. August 2013 at 00:19

    Scott, I think it might be easier for Carney to get consensus around a nominal wage target than around NGDP, since MPC members are concerned specifically about wage growth. And the nominal wage index – which is prone to revision – gives them the same illusion of certainty they get from the CPI.

    The BBC asked Woodford some questions.

    http://www.bbc.co.uk/news/business-23469370

    I can’t stop laughing at how absurd UK macro is when even Woodford is saying don’t goose inflation up too much.

  8. Gravatar of Britmouse Britmouse
    5. August 2013 at 00:22

    The nominal wage index is NOT prone to revision.

  9. Gravatar of phil_20686 phil_20686
    5. August 2013 at 02:32

    The link that readers and Scott might find interesting: http://the-econtrarian.blogspot.co.uk/2013/07/qe-why-85-billion-per-month-why-not-170.html

    More evidence that the MM story of QE is correct. QE raises long yields and that rising long yields are associated with better RGDP growth.

  10. Gravatar of Bill Woolsey Bill Woolsey
    5. August 2013 at 03:42

    The reason the BOE is interested in wages Is worries about a wage-price spiral.

    The proposal to target the growth path of average wages is bad. The result will be to make the growth path of wages even more sticky. This makes deviations of wages from that target growth paths a weaker signal of the need to adjust the demand for labor. Of course, a monetary authority hires no workers, and so only impacts the demand for labor through impacting anticipated demand for the output of labor. That is nominal GDP. Of course, a monetary authority impacts nominal GDP by impacting the expected quantity of money.

    Targeting the growth path of total labor compensation is better than wage rates. The change in employment and wage rates both shift actual labor compensation away from target and so provides a signal of a needed adjustment in the demand for labor, anticipated nominal GDP, and the anticipated quantity of money.

    If you assume that wage rates are flexible, but that workers respond to those changes in wages by adjusting the quantity of labor supplied, and that this is somehow suboptimal due to some kind of confusion, then wage rate targets would work just fine.

    If, on the other hand, wages are sticky, then targeting them would make them more sticky. The “solution,” is to add the deviation of employment from its natural level as another argument in the response function. And so, we are right back to a Taylor rule.

    The wage rate target is a bad idea.

    The total labor compensation target is similar to nominal GDP targeting and is at least a plausible candidate.

    However, consider an excess supply of money. Spending on output, rises beyond the equilibrium. In other words, nominal GDP rises. Both employment and wages are slow to adjust. Interest income is very sticky. Does the extra profit really do no harm if it doesn’t impact wages or aggregate employment?

    Consider an excess demand for money. Spending on output falls–lower nominal GDP. Is the lower profits and greater losses really no problem? Is it only when it impacts employment and wages that there is a problem?

    Now, a persistent change in labor’s share of income would be more smoothly accommodated with a labor compensation target.

  11. Gravatar of TravisV TravisV
    5. August 2013 at 04:21

    Prof. Sumner,

    Imagine if, for reasons of sustainability, the U.S. decided to implement a work sharing program nationwide.

    If we did that, wouldn’t NGDP targeting still be necessary? Would the Fed just have to switch from targeting NGDP growth to NGDP PER HOUR growth?

    Or would the Fed no longer be necessary for economic stability (full employment)?

  12. Gravatar of Britmouse Britmouse
    5. August 2013 at 04:39

    1st July 2013 – Mark Carney starts at BoE.

    July PMI data now out.

    “Strong UK Services PMI data for July follows on
    from equally positive numbers from sister
    construction and manufacturing surveys, as the
    recovery becomes increasingly broad-based and
    gains further traction heading through the summer.
    Indeed, a composite reading of the respective
    output balances from all three PMI surveys reached
    a series record high during July, driven by the
    sharpest increase in new business since March
    2004”

    Just saying…

  13. Gravatar of SG SG
    5. August 2013 at 06:52

    And on this side of the Atlantic, Brad Delong bravely carries the Team Larry banner by pointing to his articles in the Financial Times that were published during the financial crisis.

    Here’s a good one:

    Sept 28, 2008

    Indeed, in the current circumstances the case for fiscal stimulus – policy actions that increase short-term deficits – is stronger than at any time in my professional lifetime. Unemployment is now almost certain to increase – probably to the highest levels observed in a generation. Monetary policy has very little scope to stimulate the economy…. The more people who are unemployed the more desirable it is that government takes steps to put them back to work by investing in infrastructure, energy or simply through tax cuts that allow families to avoid cutting back on their spending….”

    So, Summer’s greatest defender illustrates that he made exactly the same errors that the current Fed did, and we have zero reason to believe that his views have changed, the efforts of Ashok Rao and Evan Soltas notwithstanding.

  14. Gravatar of ssumner ssumner
    5. August 2013 at 09:09

    benfitzig, I want them to pay no attention to inflation. None.

    Ashok, Those structural changes occur very gradually.

    Britmouse, Good catch. But in fairness he was talking to the press, and saying NGDP might rise too fast is less understandable to the average listener.

    Thanks Phil.

    Bill, I doubt it would make nominal wages much stickier than NGDP targeting would.

    The assumption is that they are sticky but not fixed. Hence when the average wage level changes you have disequilibrium, as some wages are stuck at the wrong level. So you do monetary policy so that the average wage doesn’t change.

    Travis, Precisely what is “work sharing?”

    Britmouse, Good sign.

    SG. Good find–worth a post.

  15. Gravatar of Sina Motamedi Sina Motamedi
    5. August 2013 at 10:14

    I expect Carney will simply introduce forward guidance, similar to the Bank of Canada’s forward guidance used in April 2009.

  16. Gravatar of Lars Christensen Lars Christensen
    5. August 2013 at 13:33

    Scott,

    Bill is right – the BoE is not talking about wage index targeting. They see wage growth as an indicator of cost push inflation. There concern now is the wage growth will cause higher inflation in the future.

    It is 1970s keynesianism with income policies etc. rather than Market Monetarism.

    I am not optimistic at all about how things are sharping out at the BoE at the moment.

  17. Gravatar of Bill Ellis Bill Ellis
    5. August 2013 at 14:04

    “Nobody takes you seriously – and yet you keep coming back spouting Austrian dogma.

    Why ?”

    My 2 cents…I think Geoff is a big improvement over Major Freedom.

  18. Gravatar of Grim23 Grim23
    5. August 2013 at 15:49

    Scott, I don’t really get that last point about targeting average hourly wages being the most optimal policy.

    Haven’t nominal hourly wages kept growing steadily in the US throughout the Great Recession? Surely that must mean that if you are targeting hourly wages, US monetary policy has been entirely appropriate for the past 5 years? For that reason I would have thought targeting aggregate wages and salaries growth was the more optimal policy.

    Also isn’t nominal wage cuts partly responsible for the UK’s good employment growth?

  19. Gravatar of Geoff Geoff
    5. August 2013 at 17:23

    Daniel:

    “I use a megaphone to shout from the street corner”

    “You do realize that’s pretty much what you’re doing around here, right ?”

    I’m actually using 2 megaphones, connected to an amplifier.

    “Nobody takes you seriously – and yet you keep coming back spouting Austrian dogma.”

    “Why?”

    For the same reason you don’t know the answer to that question.

    I don’t take you seriously, and yet you keep coming back here spouting monopolist collectivist dogma.

    Why?

  20. Gravatar of Daniel Daniel
    5. August 2013 at 23:30

    When a liberal comes across something he/she doesn’t like, he/she labels it “racism”/”sexism”/”bigotry”/etc

    When an “austrian” comes across something he/she doesn’t like, he/she labels it “collectivism”/”socialism”/”communism”/”marxism”/etc

    Either way, I’m equally impressed.

  21. Gravatar of Ben J Ben J
    6. August 2013 at 02:58

    Bill Ellis,

    I know what you mean about Geoff and Major Freedom.

    Although I’m a little sad that Geoff is an inflation conspiracist, who asserted a couple of threads ago that inflation was higher than what is being reported by a significant margin (without getting specific, or you know, having evidence) because of public choice theory and how government always lies to us, you know man?

    I don’t recall the Major ever denying simple statistics, especially something as absurd as claiming inflation is high and no one has noticed.

  22. Gravatar of ssumner ssumner
    6. August 2013 at 13:48

    Lars, Controlling wage gains with an incomes policy seems quite different from controlling wages with monetary policy.

    Grim23, No, wage growth slowed in 2009. If monetary policy had been expansionary enough for wages to keep growing at 3.5%/year, the recession would have been far, far milder.

    Daniel, I’ve noticed that too.

  23. Gravatar of Grim23 Grim23
    6. August 2013 at 14:18

    Scott
    Monetary stimulus boosts employment via sticky nominal wages. In the long run, W/NGDP might be fairly stable, but in the short run, after a sudden rise in the ratio like in 2008/09, slow wage growth and rapid NGDP growth would be a good thing (or even better a lower ratio of wages to total worker compensation).

  24. Gravatar of Grim23 Grim23
    6. August 2013 at 14:49

    I found this post from a while back, showing only a moderate slowdown in wage growth since 2009. Not nearly enough to offset lower NGDP.

    https://www.themoneyillusion.com/?p=16463

    I think ninal GDP needs to catch up before wage growth is desirable. Maybe this confusion is over long run optimal policy vs short run response to sub-optimal policy.

  25. Gravatar of ssumner ssumner
    6. August 2013 at 16:04

    Grim23, I agree with those points, but that’s exactly why a policy of stable wage growth is best. The same policy that reduced wage growth modestly after 2008, led to sharply lower NGDP. If monetary policy had kept wages growing at 3.5%, then NGDP would not have fallen.

  26. Gravatar of Geoff Geoff
    6. August 2013 at 17:05

    Daniel:

    “When a liberal comes across something he/she doesn’t like, he/she labels it “racism”/”sexism”/”bigotry”/etc”

    “When an “austrian” comes across something he/she doesn’t like, he/she labels it “collectivism”/”socialism”/”communism”/”marxism”/etc”

    “Either way, I’m equally impressed.”

    I don’t call a collectivist a collectivist because I don’t like their ideas.

    I don’t call a Marxist a Marxist because I don’t like their ideas.

    I don’t call a socialist a socialist because I don’t like their ideas.

    I call someone one of these things when they espouse those ideas, even if unintentionally or implicitly.

    Does it upset you that you are a collectivist who supports a fascist/communist monetary system? Is it a sensitive issue? Don’t shoot the messenger.

    ————

    Ben J:

    “Although I’m a little sad that Geoff is an inflation conspiracist, who asserted a couple of threads ago that inflation was higher than what is being reported by a significant margin (without getting specific, or you know, having evidence) because of public choice theory and how government always lies to us, you know man?”

    I’m sad that you are an inflationist apologist, who asserts that the data is accurate, without showing any evidence.

    “I don’t recall the Major ever denying simple statistics, especially something as absurd as claiming inflation is high and no one has noticed.”

    I am not “denying” the statistics. I am denying the accuracy of those statistics.

    And I didn’t claim nobody noticed. A lot of people are noticing. You just aren’t paying much attention to these voices, because you’ve a priori labelled them all as “conspiracy theories”.

    Public choice is not a conspiracy.

    I bet that 2 years ago you believed the argument that the NSA is spying on everyone’s phone calls and emails are “conspiracy theories” in the pejorative sense.

    It’s funny that your default mentality is trusting what the government tells you. A healthy mind has a default of questioning and doubting every single thing they say, not just based on history, but on the nature of government itself, and what incentives are present and which behavior is punished and not punished.

    It is extremely curious that the economics profession has written a boatload of articles on the problems of economic monopoly, of how the incentive is to reduce quality and increase the costs, and how virtually every economist is doubting and skeptical of economic monopoly honesty and integrity, and yet, when it comes to the most important service of all, the protection of life and property, you and most other economists believe that we ought not question that monopoly (state). Here, for some amazing reason, the burden of proof is on the skeptics and doubters to prove their case. As if it is a law of nature and unquestionable that the production of security and defense ought to be a monopoly and anyone who thinks there might be a problem with that, are crazy conspiracy kooks who should cite the encyclopedia galactica every time they say the communication from that monopoly is not to be trusted.

    Would you trust the publicized comments of a private company that had an oil monopoly? Would you believe that it is up to the doubters and skeptics to prove that monopolist’s comments as likely inaccurate, due to the incentives of the payoffs to lying?

    You people make me depressed about the future of humanity. You believe in a gigantic contradiction and you can’t even see it. It’s like the bigger the contradiction, the more real and believable it becomes.

  27. Gravatar of Daniel Daniel
    7. August 2013 at 02:39

    Daniel,

    I’m as upset by your words as I would be when called a “meanie” by a small child.

    You’re kind of like a mosquito – buzzing around, being a very minor nuisance.

    Like I said before – it must be obvious to you everyone here thinks you’re a joke (unless you’re totally retarded – an option worth considering). Why do you keep posting walls of text no one reads ?

  28. Gravatar of Daniel Daniel
    7. August 2013 at 03:17

    ^ the first word above should be “Geoff”.

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