Archive for the Category Market monetarism


Basil Halperin’s critique of NGDP targeting

Lots of people have tried to find flaws in NGDP targeting, but most of these posts are written by people who have not done their homework.  Basil Halperin is an exception.  Back in January 2015 he wrote a very long and thoughtful critique of NGDP targeting.  A commenter recently reminded me that I had planned to address his arguments.  Here’s Basil:

Remember that nominal GDP growth (in the limit) is equal to inflation plus real GDP growth. Consider a hypothetical economy where market monetarism has triumphed, and the Fed maintains a target path for NGDP growing annually at 5% (perhaps even with the help of a NGDP futures market). The economy has been humming along at 3% RGDP growth, which is the potential growth rate, and 2% inflation for (say) a decade or two. Everything is hunky dory.

But then – the potential growth rate of the economy drops to 2% due to structural (i.e., supply side) factors, and potential growth will be at this rate for the foreseeable future.

Perhaps there has been a large drop in the birth rate, shrinking the labor force. Perhaps a newly elected government has just pushed through a smorgasbord of measures that reduce the incentive to work and to invest in capital. Perhaps, most plausibly (and worrisomely!) of all, the rate of innovation has simply dropped significantly.

In this market monetarist fantasy world, the Fed maintains the 5% NGDP path. But maintaining 5% NGDP growth with potential real GDP growth at 2% means 3% steady state inflation! Not good. And we can imagine even more dramatic cases.

Actually it is good.  Market monetarists believe that inflation doesn’t matter, and that NGDP growth is “the real thing”.  Our textbooks are full of explanations of why higher and unstable inflation (or deflation) is a bad thing, but in almost every case the problem is more closely associated with high and unstable NGDP growth (or falling NGDP).  In most cases it would be entirely appropriate if trend inflation rose 1% because trend growth fell by 1%.  That’s because what you really want is stability in the labor market.  If productivity growth slows then real wage growth must also slow.  But nominal wages are sticky, so it’s easier to get the required adjustment via higher inflation (and steady nominal wage growth) as compared to slower nominal wage growth.

I said “most cases” because there is one exception to this argument.  Suppose trend growth slows because labor force growth slows.  In that case then in order to keep nominal wages growing at a steady rate, you’d want NGDP growth to slow at the same rate that labor force growth slows.  As a practical matter it would be very easy to gradually adjust the NGDP growth target for changes in labor force growth. I’d have the Fed estimate the growth rate every few years, and nudge the NGDP target path up or down slightly in response to those changes.  Yes, that introduces a tiny bit of discretion.  But when you compare it to the actual fluctuations in NGDP growth, the problem would be trivial.  I’d guess that every three years or so the expected growth rate of the labor force would be adjusted a few tenths of a percent.  Even if the Fed got it wrong, the mistake would be far to small to create a business cycle.

Say a time machine transports Scott Sumner back to 1980 Tokyo: a chance to prevent Japan’s Lost Decade! Bank of Japan officials are quickly convinced to adopt an NGDP target of 9.5%, the rationale behind this specific number being that the average real growth in the 1960s and 70s was 7.5%, plus a 2% implicit inflation target.

Thirty years later, trend real GDP in Japan is around 0.0%, by Sumner’s (offhand) estimation and I don’t doubt it. Had the BOJ maintained the 9.5% NGDP target in this alternate timeline, Japan would be seeing something like 9.5% inflation today.

Counterfactuals are hard: of course much else would have changed had the BOJ been implementing NGDPLT for over 30 years, perhaps including the trend rate of growth. But to a first approximation, the inflation rate would certainly be approaching 10%.

[Basil then discusses similar scenarios for China and France.]

Basil’s mistake here is assuming that there is a 2% inflation target.  As George Selgin showed in his book ‘Less than Zero”, deflation is appropriate when there is very fast productivity growth.  Isn’t deflation contractionary?  No, that’s reasoning from a price change.  Deflation is contractionary if caused by falling NGDP.  But if NGDP (or NGDP/person) is growing at an adequate rate, then deflation is an appropriate response to fast productivity growth.  Indeed if you kept inflation at 2% when productivity growth was high, then the labor market could overheat. (See the U.S., 1999-2000).

Let’s suppose that the Japanese decide to target NGDP growth at 3% plus or minus changes in the working age population.  In that case, the target might have been 5% in the booming 1960s, and 2% today (assuming labor force growth fell from 2% to minus 1%.  Or they might have chosen 4% per person, in which case NGDP growth would have slowed from 6% to 3%.  In the first scenario, Japan would have gone from minus 2.5% inflation to about 1%, whereas in the second scenario inflation would have risen from minus 1.5% to about 2%.  Either of those outcomes would be perfectly fine.

As an aside, I recommend that countries pick an NGDP growth target higher enough so that their interest rates are not at the zero bound.  But that’s not essential; it just saves on borrowing costs for the government.

Basil does correctly note that New Keynesian advocates of NGDP targeting don’t agree with market monetarists (or with George Selgin):

Indeed, Woodford writes in his Jackson Hole paper, “It is surely true – and not just in the special model of Eggertsson and Woodford – that if consensus could be reached about the path of potential output, it would be desirable in principle to adjust the target path for nominal GDP to account for variations over time in the growth of potential.” (p. 46-7) Miles Kimball notes the same argument: in the New Keynesian framework, an NGDP target rate should be adjusted for changes in potential.

Basil points out that this would require a structural model:

For the Fed to be able to change its NGDP target to match the changing structural growth rate of the economy, it needs a structural model that describes how the economy behaves. This is the practical issue facing NGDP targeting (level or rate). However, the quest for an accurate structural model of the macroeconomy is an impossible pipe dream: the economy is simply too complex. There is no reason to think that the Fed’s structural model could do a good job predicting technological progress. And under NGDP targeting, the Fed would be entirely dependent on that structural model.

Ironically, two of Scott Sumner’s big papers on futures market targeting are titled, “Velocity Futures Markets: Does the Fed Need a Structural Model?” with Aaron Jackson (their answer: no), and “Let a Thousand Models Bloom: The Advantages of Making the FOMC a Truly ‘Open Market’”.

In these, Sumner makes the case for tying monetary policy to a prediction market, and in this way having the Fed adopt the market consensus model of the economy as its model of the economy, instead of using an internal structural model. Since the price mechanism is, in general, extremely good at aggregating disperse information, this model would outperform anything internally developed by our friends at the Federal Reserve Board.

If the Fed had to rely on an internal structural model adjust the NGDP target to match structural shifts in potential growth, this elegance would be completely lost! But it’s more than just a loss in elegance: it’s a huge roadblock to effective monetary policymaking, since the accuracy of said model would be highly questionable.

I’ve already indicated that I don’t think the NGDP target needs to be adjusted, or if it does only in response to working age population changes, which are pretty easy to forecast.  But I’d go even further.  I’d argue that the Woodford/Eggertsson/Kimball approach is quite feasible, and would work almost as well as my preferred system.  The reason is simple; business cycles represent a far greater challenge than shifts in the trend rate of output.  Because NGDP growth is what matters for cyclical stability, it doesn’t matter if inflation is somewhat unstable at cyclical frequencies.  That’s a feature, not a bug.  And longer-term changes in trend growth tend to be pretty gradual.  In the US, trend growth was about 3% during the entire 20th century.  Since 2000, trend growth has been gradually slowing, for two reasons:

1.  The growth in the working age population is slowing.

2.  Productivity growth is also slowing.

Experts now believe the new trend is 2%, or slightly lower.  I think it’s more like 1.5%.  But I fail to see how this would add lots of discretion to the system. Imagine if the Fed targets NGDP growth at 5% throughout the entire 20th century, using my 4% to 6% NGDP futures guardrails.  No Great Depression, no Great Inflation, no Great Recession.  Then we go into the 21st century, and the Fed gradually reduces the target to 4.5%, then to 4.0%.  And let’s use the worst case, where the Fed is slow to recognize that trend growth has slowed.  So you have slightly higher than desired inflation during that recognition lag.  But also recall that only NKs like Woodfood, Eggertsson and Kimball think that’s a problem.  Market monetarists and George Selgin think inflation should vary as growth rates vary.

Who’s opinion are you going to trust?  (Don’t answer that.)

Seriously, even in the worst case, this system produces macro instability that is utterly trivial compared to what we’ve actually experienced.  Or at least if we hit our targets it’s highly successful.  And Basil is questioning the target, not the Fed’s ability to hit the target.  You would have had 117 years with only one significant alteration in the target path.  Yes, for almost any other country, the results would be far worse.  But that’s why you don’t want to adjust the NGDP target for changes in trend RGDP growth.

Further, level targeting exacerbates this entire issue. . . . For instance, say the Fed had adopted a 5% NGDP level target in 2005, which it maintained successfully in 2006 and 2007. Then, say, a massive crisis hits in 2008, and the Fed misses its target for say three years running. By 2011, it looks like the structural growth rate of the economy has also slowed. Now, agents in the economy have to wonder: is the Fed going to try to return to its 5% NGDP path? Or is it going to shift down to a 4.5% path and not go back all the way? And will that new path have as a base year 2011? Or will it be 2008?

Under level targeting there is no base drift.  So you try to come up to the previous trend line.  In 2011 you set a new 4.5% line going forward, but until you change that trend line, the existing 5% trend line still holds.  If you drop the growth path to 4.5% in 2011, then by 2013 the target for NGDP will be 1% less than people would have expected in 2008, and by 2015 it will be 2% less.  In fact, NGDP was more like 10% less than people expected.  So even if a gradually adjusting path is not ideal, it’s a compromise worth making to satisfy the NKs who are far more influential than I am, but have yet to read Less Than Zero.  (George may not agree with the compromise, he’s less wimpy than I am.)

Before I close this out, let me anticipate four possible responses.

1. NGDP variability is more important than inflation variability

Nick Rowe makes this argument here and Sumner also does sort of here. Ultimately, I think this is a good point, because of the problem of incomplete financial markets described by Koenig (2013) and Sheedy (2014): debt is priced in fixed nominal terms, and thus ability to repay is dependent on nominal incomes.

Nevertheless, just because NGDP targeting has other good things going for it does not resolve the fact that if the potential growth rate changes, the long run inflation rate would be higher. This is welfare-reducing for all the standard reasons.

The “standard reasons” are wrong.  The biggest cost of inflation, by far, is excess taxation of capital income.  That’s better proxied by NGDP growth than inflation. Things like “menu costs” are essentially unrelated to inflation as measured by the government.  The PCE doesn’t measure the average amount that the price of “stuff” changes; it measures the average amount by which the price of “quality-adjusted stuff” changes.  Hedonics.  If the government were serious about targeting inflation, they’d need to come up with an inflation measure that actually matches the supposed welfare costs of inflation in the textbooks.  We don’t have that.  We have nonsense like “rental equivalent”. The standard welfare costs also ignore the massive costs of nominal wage stickiness.  And Basil mentions the incomplete financial markets problem.  Please, can macroeconomists stop talking about inflation, and use NGDP growth as their nominal indicator?  It would make life much simpler.

2. Target NGDP per capita instead!

You might argue that if the most significant reason that the structural growth rate could fluctuate is changing population growth, then the Fed should just target NGDP per capita. Indeed, Scott Sumner has often mentioned that he actually would prefer an NGDP per capita target. To be frank, I think this is an even worse idea! This would require the Fed to have a long term structural model of demographics, which is just a terrible prospect to imagine.

Actually, it’s pretty easy to predict changes in working age population, because we know how many 64 year olds will turn 65, and we know how many 17 year olds will turn 18.  And immigration doesn’t vary much from year to year.  The Fed doesn’t need long range forecasts; three years out would be plenty.  As long as the market understands that the NGDP target path will be gradually adjusted for population growth, they can form their own forecasts when making decisions like buying 30-year bonds.

I want to support NGDPLT: it is probably superior to price level or inflation targeting anyway, because of the incomplete markets issue. But unless there is a solution to this critique that I am missing, I am not sure that NGDP targeting is a sustainable policy for the long term, let alone the end of monetary history.

I still think that NGDPLT, combined with guardrails is the end of macroeconomics as we know it.  All that would be left is discussions of supply-side policies to boost long-term growth. The freshman econ sequence could be reduced to one semester. Or better yet a full year, with a more in depth discussion of micro.

PS.  In this new Econlog post I make some forecasts.

Basil Halperin on the logic behind NGDP targeting

James Alexander directed me to a recent post by Basil Halperin, which is one of the best blog posts that I have read in years.  (I was actually sent this material before Christmas, but it sort of fell between the cracks.)

Basil starts off discussing a program for distributing excess food production from manufacturers to food banks.

The problem was one of distributed versus centralized knowledge. While Feeding America had very good knowledge of poverty rates around the country, and thus could measure need in different areas, it was not as good at dealing with idiosyncratic local issues.

Food banks in Idaho don’t need a truckload of potatoes, for example, and Feeding America might fail to take this into account. Or maybe the Chicago regional food bank just this week received a large direct donation of peanut butter from a local food drive, and then Feeding America comes along and says that it has two tons of peanut butter that it is sending to Chicago.

To an economist, this problem screams of the Hayekian knowledge problem. Even a benevolent central planner will be hard-pressed to efficiently allocate resources in a society since it is simply too difficult for a centralized system to collect information on all local variation in needs, preferences, and abilities.

One option would simply be to arbitrarily distribute the food according to some sort of central planning criterion.  But there is a better way:

This knowledge problem leads to option two: market capitalism. Unlike poorly informed central planners, the decentralized price system – i.e., the free market – can (often but not always) do an extremely good job of aggregating local information to efficiently allocate scarce resources. This result is known as the First Welfare Theorem.

Such a system was created for Feeding America with the help of four Chicago Booth economists in 2005. Instead of centralized allocation, food banks were given fake money – with needier food banks being given more – and allowed to bid for different types of food in online auctions. Prices are thus determined by supply and demand. . . .

By all accounts, the system has worked brilliantly. Food banks are happier with their allocations; donations have gone up as donors have more confidence that their donations will actually be used. Chalk one up for economic theory.

Basil points out that while that solves one problem, there is still the issue of determining “monetary policy”, i.e. how much fake money should be distributed each day?

Here’s the problem for Feeding America when thinking about optimal monetary policy. Feeding America wants to ensure that changes in prices are informative for food banks when they bid. In the words of one of the Booth economists who helped design the system:

“Suppose I am a small food bank; I really want a truckload of cereal. I haven’t bid on cereal for, like, a year and a half, so I’m not really sure I should be paying for it. But what you can do on the website, you basically click a link and when you click that link it says: This is what the history of prices is for cereal over the last 5 years. And what we wanted to do is set up a system whereby by observing that history of prices, it gave you a reasonable instinct for what you should be bidding.”

That is, food banks face information frictions: individual food banks are not completely aware of economic conditions and only occasionally update their knowledge of the state of the world. This is because obtaining such information is time-consuming and costly.

Relating this to our question of optimal monetary policy for the food bank economy: How should the fake money supply be set, taking into consideration this friction?

Obviously, if Feeding America were to randomly double the supply of (fake) money, then all prices would double, and this would be confusing for food banks. A food bank might go online to bid for peanut butter, see that the price has doubled, and mistakenly think that demand specifically for peanut butter has surged.

This “monetary misperception” would distort decision making: the food bank wants peanut butter, but might bid for a cheaper good like chicken noodle soup, thinking that peanut butter is really scarce at the moment.

Clearly, random variation in the money supply is not a good idea. More generally, how should Feeding America set the money supply?

One natural idea is to copy what real-world central banks do: target inflation.

Basil then explains why NGDP targeting is likely to be superior to inflation targeting, using a Lucas-type monetary misperceptions model.

III. Monetary misperceptions
I demonstrate the following argument rigorously in a formal mathematical model in a paper, “Monetary Misperceptions: Optimal Monetary Policy under Incomplete Information,” using a microfounded Lucas Islands model. The intuition for why inflation targeting is problematic is as follows.

Suppose the total quantity of all donations doubles.

You’re a food bank and go to bid on cheerios, and find that there are twice as many boxes of cheerios available today as yesterday. You’re going to want to bid at a price something like half as much as yesterday.

Every other food bank looking at every other item will have the same thought. Aggregate inflation thus would be something like -50%, as all prices would drop by half.

As a result, under inflation targeting, the money supply would simultaneously have to double to keep inflation at zero. But this would be confusing: Seeing the quantity of cheerios double but the price remain the same, you won’t be able to tell if the price has remained the same because
(a) The central bank has doubled the money supply
(b) Demand specifically for cheerios has jumped up quite a bit

It’s a signal extraction problem, and rationally you’re going to put some weight on both of these possibilities. However, only the first possibility actually occurred.

This problem leads to all sorts of monetary misperceptions, as money supply growth creates confusions, hence the title of my paper.

Inflation targeting, in this case, is very suboptimal. Price level variation provides useful information to agents.

IV. Optimal monetary policy
As I work out formally in the paper, optimal policy is instead something close to a nominal income (NGDP) target. Under log utility, it is exactly a nominal income target. (I’ve written about nominal income targeting before more critically here.)

. . .  Feeding America, by the way, does not target constant inflation. They instead target “zero inflation for a given good if demand and supply conditions are unchanged.” This alternative is a move in the direction of a nominal income target.

V. Real-world macroeconomic implications
I want to claim that the information frictions facing food banks also apply to the real economy, and as a result, the Federal Reserve and other central banks should consider adopting a nominal income target. Let me tell a story to illustrate the point.

Consider the owner of an isolated bakery. Suppose one day, all of the customers seen by the baker spend twice as much money as the customers from the day before.

The baker has two options. She can interpret this increased demand as customers having come to appreciate the superior quality of her baked goods, and thus increase her production to match the new demand. Alternatively, she could interpret this increased spending as evidence that there is simply more money in the economy as a whole, and that she should merely increase her prices proportionally to account for inflation.

Economic agents confounding these two effects is the source of economic booms and busts, according to this model. This is exactly analogous to the problem faced by food banks trying to decide how much to bid at auction.

To the extent that these frictions are quantitatively important in the real world, central banks like the Fed and ECB should consider moving away from their inflation targeting regimes and toward something like a nominal income target, as Feeding America has.

The paper he links to contains a rigorous mathematical model that shows the advantages of NGDP targeting. He doesn’t claim NGDP targeting is always optimal, but any paper that did would actually be less persuasive, as it would mean the model was explicitly constructed to generate that result. Instead the result flows naturally from the Lucas-style archipelago model, where each trader is on their own little island observing local demand conditions before aggregate (NGDP conditions). This is the sort of approach I used in my first NGDP futures targeting paper, where futures markets aggregated all of this local demand (i.e. velocity) information. However Basil’s paper is light years ahead of where I was in 1989.

I can’t recommend him highly enough.  I’m told he recently got a BA from Chicago, which suggests he may be another Soltas, Wang or Rognlie, one of those people who makes a mark at a very young age.  He seems to combine George Selgin-type economic intuition (even citing a lovely Selgin metaphor at the end of his post) with the sort of highly technical skills required in modern macroeconomics.

Commenters often ask (taunt?) me with the question, “Where is the rigorous model for market monetarism”.  I don’t believe any single model can incorporate all of the insights from any half decent school of thought, but Basil’s model certainly provides the sort of rigorous explanation of NGDP targeting that people seem to demand.

Basil has lots of other excellent posts, and over the next few weeks and months I will have more posts responding to some of the points he makes (which to his credit, include criticism of NGDP targeting–he’s no ideologue.)

Nick Rowe on the New Keynesian model

Here’s Nick Rowe:

I understand how monetary policy would work in that imaginary Canada (at least, I think I do). Increasing the quantity of money (holding the interest rate paid on money constant) shifts the LM curve to the right/down. Increasing the rate of interest paid on holding money (holding the quantity of money constant) shifts the LM curve left/up. Done.

It’s a crude model of an artificial economy. But it’s a helluva lot better than a simple New Keynesian model where money (allegedly) does not exist and the central bank (somehow) sets “the” nominal interest rate (on what?).

I think this is right.  But readers might want more information.  Exactly what goes wrong if you ignore money, and just focus on interest rates?  Let’s create a simple model of NGDP determination, where i is the market interest rate and IOR is the rate paid on base money:

MB x V(i – IOR) = NGDP

In plain English, NGDP is precisely equal to the monetary base time base velocity, and base velocity depends on the difference between market interest rates and the rate of interest on reserves, among other things.  To make things simple, I’m going to assume IOR equals zero, and use real world examples from the period where that was the case.  Keep in mind that velocity also depends on other factors, such as technology, reserve requirements, etc., etc.  The following graph shows that nominal interest rates (red) are positively correlated with base velocity (blue), but the correlation is far from perfect.


[After 2008, the opportunity cost of holding reserves (i – IOR) was slightly lower than shown on the graph, but not much different.]

What can we learn from this model?

1.  Ceteris paribus, an increase in the base tends to increase NGDP.

2.  Ceteris paribus, an increase in the nominal interest rate (i) tends to increase NGDP.

Of course, Keynesians often argue that an increase in interest rates is contractionary.  Why do they say this?  If asked, they’d probably defend the assertion as follows:

“When I say higher interest rates are contractionary, I mean higher rates that are caused by the Fed.  And that requires either a cut in the monetary base, or an increase in IOR.  In either case the direct effect of the monetary action on the base or IOR is more contractionary than the indirect effect of higher market rates on velocity is expansionary.”

And that’s true, but there’s still a problem here.  When looking at real world data, they often focus on the interest rate and then ignore what’s going on with the money supply—and that gets them into trouble.  Here are three examples of “bad Keynesian analysis”:

1. Keynesians tended to assume that the Fed was easing policy between August 2007 and May 2008, because they cut interest rates from 5.25% to 2%.  But we’ve already seen that a cut in interest rates is contractionary, ceteris paribus. To claim it’s expansionary, they’d have to show that it was accompanied by an increase in the monetary base.  But it was not—the base did not increase—hence the action was contractionary.  That’s a really serious mistake.

2.  Between October 1929 and October 1930, the Fed reduced short-term rates from 6.0% to 2.5%.  Keynesians (or their equivalent back then) assumed monetary policy was expansionary.  But in fact the reduction in interest rates was contractionary.  Even worse, the monetary base also declined, by 7.2%.  NGDP decline even more sharply, as it was pushed lower by both declining MB and falling interest rates.  That’s a really serious mistake.

3.  During the 1972-81 period, the monetary base growth rate soared much higher than usual.  This caused higher inflation and higher nominal interest rates, which caused base velocity to also rise, as you can see on the graph above.  Keynesians wrongly assumed that higher interest rates were a tight money policy, particularly during 1979-81.  But in fact it was easy money, with NGDP growth peaking at 19.2% in a six-month period during late 1980 and early 1981.  That was a really serious error.

To summarize, looking at monetary policy in terms of interest rates isn’t just wrong, it’s a serious error that has caused great damage to our economy.  We need to stop talking about the stance of policy in terms of interest rates, and instead focus on M*V expectations, i.e. nominal GDP growth expectations.  Only then can we avoid the sorts of policy errors that created the Great Depression, the Great Inflation and the Great Recession.

PS.  Of course Neo-Fisherians make the opposite mistake, forgetting that a rise in interest rates is often accompanied by a fall in the money supply, and hence one cannot assume that higher interest rates are easier money.  Both Keynesians and Neo-Fisherians tend to “reason from a price change”, ignoring the thing that caused the price change.  The only difference is that they implicitly make the opposite assumption about what’s going on in the background with the money supply. Although the Neo-Fisherian model is widely viewed as less prestigious than the Keynesian model, it’s actually a less egregious example of reasoning from a price change, as higher market interest rates really are expansionary, ceteris paribus.

PPS.  Monetary policy is central bank actions that impact the supply and demand for base money.  In the past they impacted the supply through OMOs and discount loans, and the demand through reserve requirements.  Since 2008 they also impact demand through changes in IOR.  Thus they have 4 basic policy tools, two for base supply and two for base demand.

PPPS.  Today interest rates and IOR often move almost one for one, so the analysis is less clear.  Another complication is that IOR is paid on reserves, but not currency.  Higher rates in 2017 might be expected to boost currency velocity, but not reserve velocity.  And of course we don’t know what will happen to the size of the base in 2017.

Under blogger eyes

I’m noticing that a lot of people don’t understand what I’m trying to do with this blog (Econlog they get).  Generally, I don’t like to analyze my own behavior, but in this case I’m going to have to make an exception.

The first thing you need to understand is that I’m superstitious about one thing.  I feel like horrible things won’t happen if everyone expects them to happen.  In late 2008, I was very frustrated over the fact that almost no one was talking about monetary policy, whereas I thought monetary policy was both far off course, and also the key to the Great Recession.  Even worse, I felt like I was mute—I had no voice in the conversation.

Eventually I started a blog, and wrote hundreds of histrionic over-the-top posts about how utterly brain dead Fed policy was in late 2008.  I mocked the September 2008 meeting, where they refused to cut interest rates.  I mocked the October 2008 decision to institute IOR.  I mocked Fed people who suggested that fiscal stimulus would help, at a time the Fed was not doing all it could.  And most of all, I relentless mocked the utter stupidity of allowing NGDP growth to plunge from positive 5% to negative 3%.  I became a proud member of a group known as “monetary cranks.”

My superstitious mind led me to believe that if everyone began paying attention to monetary policy, and particularly if everyone started paying attention to NGDP growth, then we would not repeat the mistake of 2008.  And it worked in the US—so far.  Now of course that doesn’t mean I had anything to do with it; I suspect if I had never been born things would have played out roughly the same way.  After all, lots of other market monetarists and even NKs were making some of the very same arguments.  But maybe I had a tiny role in reviving interest in the importance of monetary policy, and NGDP more specifically.  And that’s good enough for me. (And they did make the same mistake again in Europe (in 2011), where MM and NK ideas are less often discussed.)

I have the same sort of superstition about Trump.  I feel like if I write one absurd over-the-top post after another pointing out how utterly insane his views are on everything from the trade deficit to our One China policy, I can play a small role in making certain ideas seem disreputable.  I want to make it so that people are embarrassed, or feel a sense of shame, when they claim that trade deficits reduce GDP.  Or when they claim we should not lift a finger to prevent Russia from invading a foreign country, but should risk WWIII to prevent China from invading China.

Sometimes commenters ask me if I’m willing to bet on my predictions, or they ask why I am being so over the top in my criticism.  That misses the point entirely.  I’m doing these posts precisely in the hope that I’m wrong.  In fact (and here’s the superstitious part) I’m doing these posts in the hope that they cause the predictions to be wrong.  (Of course I mean these posts, and similar pieces by 100s of other pundits.)

They say that a watched pot never boils.  I feel like if the entire world of punditry were to focus like a laser on the utter stupidity of people like Ross and Navarro, then it would make their jobs a bit harder.  That spotlight might chasten them slightly.  Maybe a reporter will ask Ross if “He really believes EC101 teaches us that trade deficits reduce growth, because ya know, all the authors of those textbooks say it teaches exactly the opposite.”  Or “What grade did you get in your EC101 course, and how long ago was it.”  I want the idea that trade deficits reduce GDP to become as toxic, as laughable, as disreputable, as the idea that the Fed should stand idly by as NGDP falls by 3%.

This is all superstition, so I don’t expect anyone to see things the way I do.  All I can do is tell you that I find that when society as a whole focuses really hard on the utter stupidity of doing something, we actually almost never do that specific stupid thing.  We do lots of other stupid things, which we never saw coming, but not the one we obsessed about.  Or at least that’s how it seems to me.  (It also seems like I’m always in the slowest line at grocery stores.)

That doesn’t mean this is all an act on my part, I really believe that the views of Trump and his henchmen are borderline insane.  But I have no idea what Trump will actually do, because over the course of my life I rarely observe governments doing things that are widely viewed as obviously insane.  What about late 2008? Yes, I viewed that period as obviously insane, but the profession as a whole certainly did not–so that doesn’t violate my generalization.

Every time a respected economist says, “Maybe the anti–globalization people have a point” or “Maybe China trade really did decimate our working class”, it makes a Trump disaster more likely.  It weakens the intellectual wall of resistance to insane protectionist policies, by making them seem slightly less insane.  “Well even economists don’t agree . . . “.  We need a wall of strong opposition to the Trump program, or we risk a repeat of late 2008, with a global trade war replacing a global monetary policy failure.  That’s not my prediction of what will happen, but rather my prediction of what will happen if we fail to create the right zeitgeist.

I appreciate those who worry about my sanity, but my writing style actually has nothing to do with my mood.  I’m not like Paul Krugman; I don’t lose sleep over Hillary not winning.  Indeed I would have found a Hillary presidency to be dismal. This is a freak show, but a damn entertaining one.  Most of my real passion is focused on my book project, or the film I saw last night (2 episodes of a Polish TV show from 1988, called Dekalog—magnificent) or how Giannis Antetokounmpo and Russell Westbrook are doing. That’s “real life” for me, not politics.  I really do think the Trump phenomenon is an appalling freak show; but deep down I don’t think any of it will really happen—again, a watched pot never boils.

Of course there’s Germany in 1933 . . . no don’t go there. . . .

So the hysterical posts will continue until the morale in the comment section improves.

PS.  You may wonder about my earlier snobby claims that I don’t watch TV.  I saw the 1988 Polish TV show at the movie theatre.

PPS.  Some of you people who are attempting to be trolls—you are so far behind where the discussion is, you really ought to do something else with your time. There’s no shame in not being smart enough to follow the discussion.  But if you do insist on continuing to click on this blog, I’m going to keep cashing the advertising checks.

PPPS.  I probably won’t respond to any comments here, as I’m smart enough to know that my superstition is not intellectually defensible—so why bother trying to defend it?

PPPPS.  One commenter asked why I don’t leave the country.  What other country allows me to watch Polish TV shows one night, and NBA League pass games the next?  America will be fine; presidents have very little power.  R.E.M. put it best.

PPPPPS.  Off topic, but have you noticed that the moment we get a Republican president the pundits are full of discussion of “monetary offset”?  I may have lots of faults, but I do the exact same analysis regardless of who’s in office.

Did Kuroda luck out?

Most people will think this post is sour grapes on my part, but I’ve never cared what most people think.  I simply offer my honest opinion.  I was skeptical of Kuroda’s plan to peg bond yields.  (In this post I suggested that it was a positive step, but likely to have only a very small impact.)  But as of today the policy seems to be working.  The yen has lost about half of the ground gained over the last year. Recall it moved from about 125/dollar a year ago to 100 in late summer.  Now it’s plunged to 112.8.


So was I wrong?  I still don’t think so; rather I think that Kuroda got lucky.  Just after the policy shift, US bond yields started rising, in both real and nominal terms. Rates in some other important countries also started increasing.  This made the pegged 0% yield on 10-year JGBs look increasingly unattractive.  The yen depreciated.  If that change in global debt markets had not occurred, I doubt the policy would have had much impact.  Still, give Kuroda credit, as he was right and I was wrong.  (The markets were also wrong, and I’m a market monetarist.  Hence my incorrect prediction.)

If there’s a silver lining, it’s that I was less wrong than NeoFisherians who think a policy of lowering bond yields is disinflationary (I say never reason from a bond yield).  Keynesians who thought the BOJ was out of ammo were also wrong.  I always thought they had plenty of ammo, I just saw other tools as being more promising.

I’m not going to totally change my views based on this one data point, but I’ll file it away as one argument in favor of Ben Bernanke’s view of monetary policy.  (He’s the one who suggested this idea to Kuroda.)

PS.  If Japan were to hold the yen at around this level, then in the long run Japan would have about the same 2% inflation as the US is likely to have.  Markets currently don’t think the Japanese will do so, and thus they expect lower inflation in Japan.  But it’s entirely up to the Japanese where they want to set the exchange rate, and their inflation rate.  That’s a lesson I hope we can all agree on, except Noah Smith.

PPS.  Here’s another way of explaining my “lucky” argument.  The yen has fallen only slightly against the euro.  Europe also got lucky.