Cato Unbound on monetary policy options

Gerald O’Driscoll has a new essay over at Cato Unbound, and I was asked to write a comment.  Here it is.

My only quibble is the title they gave my essay.  I favor maximum policy rigidity—the pegging of the price of a NGDP futures contract.

There will be further discussion posted over the following few days and weeks.

Update:  Bob Murphy noticed an inconsistency in my claim here.  In my Cato piece I did suggest policy flexibility, in the sense of having a regime that can be changed if it doesn’t work out.  What I do not favor is a regime that gives policymakers flexibility within that regime.  Thus if you really want 2% inflation, you should focus like a laser on 2% inflation–no flexibility.  But if it becomes clear that the regime is not optimal, you want a regime that allows for a shift to something like NGDP targeting.  The US has a system where we can do that, Greece does not.  That’s what I meant by flexibility.  But my complaint here was misleading, nothing wrong with the Cato title.  Mea culpa.

However Bob still doesn’t know what “reasoning from a price change” is:

You spend months reading him, to understand his world view and why, for example, you should “never reason from a price change,” and then you’re told that a jump in stock prices proves QE is working. It’s truly why I am not following him as closely as I used to, because I don’t feel that he’s a stationary target.

Reasoning from a price change would be if you saw stock prices jump and inferred that the Fed must have done QE that day.  I look at stocks in the 5 minute period after QE is announced.  I already know the shock, I just want to see how it’s interpreted.

Commenter Gordon also noticed Bob’s point.



17 Responses to “Cato Unbound on monetary policy options”

  1. Gravatar of JohnB JohnB
    8. November 2013 at 08:35


    It seems that you only discuss history from 1929 onwards. Looking back a little farther is still useful.

    Fiat money has an undeniable inflationary bias. Just because it isn’t 10% a year doesn’t mean that it isn’t a factor. The pre-WWI, true classical gold standard produced slowly falling prices over time without anything resembling the Great Depression.

    Historically, 2% inflation per year exceeds the inflation produced by kings chipping away at gold coins or the famous 3rd century crisis and inflation in the late Roman Empire. 2% inflation would mean that in 35-36 years, $1 losses half of it’s value. We can see from records of coin revaluations that this would represent very rapid inflation similar to the worst historical episodes. The devaluations of precious metal coins by irresponsible kings, emperors, and tyrants desperately paying soldiers at any expense doesn’t produce inflation like this.

    Even at 2% inflation there is no comparison between precious metal and paper standards when we are talking about holding value over time.

  2. Gravatar of TravisV TravisV
    8. November 2013 at 09:00

    Just a phenomenal essay, everyone should read it!

    Scott Sumner’s pragmatic libertarianism:

    “So then it becomes a judgment call. How bad are the future mistakes under fiat money likely to be? And how bad might things end up under a rigid monetary regime such as a gold standard? In my view the downside risks from a return to a gold standard, however constituted, are far greater than the risks of persevering with fiat money and trying to make incremental improvements.”

    Major_Freedom’s dogmatic libertarianism:

    “Sure, I have always said that NGDP targeting is superior to consumer price level targeting. But I also think productivity norm is superior to NGDP targeting, and I also think a free market in money production is superior to the productivity norm.

    I vehemently reject the illusion that we have to choose between NGDP targeting and dual mandate. If I said killing 1 million innocent people is superior to killing 100 million innocent people, then it would be absurd to support killing 1 million people on the silly foundation that “we have to choose between these two, so choose.”

    I think anyone who did support it would only be doing so to manifest a desire to harm people. The fake “If it’s not 1 million, it will be 100 million” is a cop out.

    Life is not tough. Like is wonderful. Ideas can change. Knowledge can spread. We are not doomed to NGDP or dual mandate.

    I refuse to capitulate, Morgan. If enough people thought like me, NGDP targeting would be an impossibility and the optimal that you say is not possible, will become possible.

    If we lived in a concentration camp, and everyone capitulated, then who will abolish the concentration camps? The guards? No, the prisoners are the only hope. But they can’t abolish it if they are being educated by people who apologize for the guards.

    Being a true intellectual is not like a 9-5 job where you punch in and punch out and secure your income in the warm bosom of taxpayer financing. Those are court intellectuals. Technocrats. Bureaucrats. Political strategists. Opportunists. True intellectuals are radicals, bordering on insanity in the eyes of others, at the fringe.

    When you look back on history, and you think of influential intellectuals, do you think of back office econometricians who collect economic data for the statesmen’s pleasure? Or do you think of those who were so crazy in the eyes of others that the rabble jailed them and killed them (Socrates)?”

    Bottom line: the utilitarianism of Milton Friedman and Scott Sumner has achieved a lot more positive change in the world than the dogmatism of Ron Paul, von Mises, Ayn Rand and Major_Freedom.

  3. Gravatar of J.V. Dubois J.V. Dubois
    8. November 2013 at 09:06

    JohnB: you should follow Scott Sumner more closely. The main point he argues is that it is nominal income and not inflation that is importance from the point of view of monetary economy

    For instance according to Friedman-Schwartz while prices fell on average by 3.8% between 1869-1879 in USA, the real growth was much higher 6.8% [4.5% per-capita adjusted] giving us “comfortable” nominal income growth of 3% and still positive nominal income growth even after per-capita adjustment. Money supply data support this view with growth from $1.298 billion to $1.698 billion.

    So long story short: not only had 19th century economy had much more flexible prices, the overall productivity growth during industrial revolution fortunately shielded most workers from nominal cuts. However the times were bad enough for it to be described as “Great Depression” by conterporaries (later renamed Long Depression|.

    With the level of income at the time where most workers were subsistence ones, with virtually no social safety net 10% unemployment spelled political disaster.

    What follows is my personal interpretation but I think that with more sensible monetary policy even back at the time we could have much milder communist movement in late 19th century. The moral of the story is similar to what Scott gives in his essay – tight money may be the most dangerous idea for a healthy free-market economy.

  4. Gravatar of J.V. Dubois J.V. Dubois
    8. November 2013 at 09:15

    Scott: I read the essay and it is a very well written and thoughtful peace. I like how you politely yet strongly explain where your opinion differs to that of Gerald O’Driscoll.

    And I agree that the title is not good for general audience. You are for rule based monetary policy, but on the other hand people supporting gold standard are most likely overrepresented in the audience that is served by Cato. So you may easily be considered as proponent of “flexible” policy from their point of view.

  5. Gravatar of ssumner ssumner
    8. November 2013 at 10:51

    JohnB. Recall that trend inflation of 2% doesn’t really hurt savers (except the tax effect), only cash holders. Most people don’t hold cash very long, so I don’t see it as a big problem. Of course I prefer NGDP targeting.

    Thanks Travis and JV.

  6. Gravatar of TravisV TravisV
    8. November 2013 at 11:09

    The Internet War rages on between Ron Paul and Scott Sumner.

    Ron Paul today:

    “Remember, too, that the transmission of news and information is becoming decentralized. One no longer has to be part of the media establishment in order to get a hearing and even a following. I am looking to train the coming generations of libertarians to take up this role. That way, we can have an influence out of proportion to our numbers.”

  7. Gravatar of Gordon Gordon
    8. November 2013 at 15:45

    I think the problem with the title chosen by the folks at Cato comes from the opening paragraphs. In them, you argue for flexibility of choosing a policy regime. Those of us who follow you here know you call for a rigid policy. And flexibility in choosing a policy regime is not the same as having a flexible policy. But those first few paragraphs don’t make that distinction clear to the readers who may be new to your views.

    I also enjoyed this observation: “Suppose that at the same time rapid economic growth in a continent with 60% of the world’s population (and a strong cultural affinity for gold) led to soaring nonmonetary demand for gold.” It’s not hard to guess which continent you meant even if you had left out the 60% hint. Or suppose it was some government that pulled the equivalent of the Silver Act.

  8. Gravatar of maynardGkeynes maynardGkeynes
    8. November 2013 at 20:07

    Prof Sumner, I think I understand your point about trend inflation and the Fisher effect protecting savers. What i don’t understand is, if that is true, how QE works at all, insofar as the Fisher effect implies that rates on nominal bonds (and the inflation adjustment part of linkers) will simply rise to cancel out the the inflationary impact of the increase in the money brought about by QE. Thus, to the extent QE works at all, it would only be the brief period before bondholders realize the inflation that is happening and bid up the rates. Alternatively, QE works by artificially suppressing real rates, which would seem to hurt savers (and not just cash holders). Pls explain// Thanks.

  9. Gravatar of paul Einzig paul Einzig
    8. November 2013 at 21:12

    Here is a link to a paper on ” Gibsons Paradox” by Larry Summers and Robert Barsky:

  10. Gravatar of Michael Michael
    9. November 2013 at 04:50


    Check out Sumner’s series of posts on money:

    I think he addressed some of your questions there.

  11. Gravatar of maynardGkeynes maynardGkeynes
    9. November 2013 at 07:28

    Thank you Michael, and to Prof Sumner, pls ignore my q until I have had a chance to read up and see if I can get the answer from there.

  12. Gravatar of O’Driscoll vs. Sumner O’Driscoll vs. Sumner
    9. November 2013 at 07:42

    […] wait, Sumner did. On his blog linking to the exchange, Sumner writes: “My only quibble is the title they gave my essay. I favor maximum policy rigidity””the […]

  13. Gravatar of ssumner ssumner
    9. November 2013 at 08:06

    Travis, For once I agree with Paul.

    Gordon, Both good points, I added an update.

    Thanks Paul.

  14. Gravatar of JohnB JohnB
    10. November 2013 at 07:09


    In your response you were clearly arguing for flexible monetary systems that can change quickly if they appear to be “causing grievous harm.” However, here you are arguing for maximal rigidity with pegging the price of an NGDP futures contract.

    You didn’t address Bob Murphy’s point by answering the blatantly obvious question: What happens if NGDP futures targeting causes grievous harm?

    I personally think you were being slippery in your response to your response and your response to Murphy’s response to your response.

  15. Gravatar of Major_Freedom Major_Freedom
    10. November 2013 at 07:37


    Thank you for quoting me at length.

    I cannot help but notice that your criteria for separating the individuals into those two groups just so happens to coincide with those who advocate for initiations of violence in some respects, and those who advocate for no initiations of violence under any respect. Is that a coincidence? I hope you realize that you are saying more about yourself than those people.

    I feel honored that you put my name in the same list as those great influential thinkers.

    As for your value judgment of what constitutes “good”, I doubt that you even realize that you are not the only individual in the world. What you find to be “good” is not what I find to be “good.” You know this, so you have to fall back on tribal mentality: Utilitarianism. You lack a standard that would include and appeal to every individual’s rationality and value judgments, and recognizing them as sovereign.

    Appealing to utilitarianism instead of individual rationality would justify you being murdered if the great majority of people happened to derive happiness from it. What is actually stopping totalitarianism is not utilitarianism, but the “dogmatism” you disparage. I do believe that this is the real reason you don’t like it. If it weren’t for the “dogmatists”, such as the ones you listed, you’d likely never have been born, because your parents or grandparents would likely be dead or toiling in a concentration camp.

    I believe you don’t like the “dogmatists” because they expose the embarrassing foundations of your convictions. I believe you don’t like it that they show what you are really advocating. Anyone who seriously studies utilitarianism, and had a modicum of moral sensitivity, would consider utilitarianism superior to principled rationality, or what you pejoratively call “dogmatism.”

    Hopefully at some point you’ll learn the (flawed) dogmatism behind utilitarianism.

  16. Gravatar of Major_Freedom Major_Freedom
    10. November 2013 at 07:40


    “Anyone who seriously studies utilitarianism, and had a modicum of moral sensitivity, would consider utilitarianism superior to principled rationality, or what you pejoratively call “dogmatism.””

    Should read

    “Anyone who seriously studies utilitarianism, and had a modicum of moral sensitivity, would not consider utilitarianism superior to principled rationality, or what you pejoratively call “dogmatism.”

    I think it should go without saying, but you never know.

  17. Gravatar of ssumner ssumner
    11. November 2013 at 06:23

    JohnB, I think I was clear that if NGDP targeting is doing harm you abandon it.

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