How far we’ve come

Here’s the respected Wolfgang Münchau, columnist at the Financial Times:

This is a debate about nominal income targeting, where a central bank no longer stabilises the inflation rate directly but focuses instead on stabilising nominal gross domestic product. You can think of nominal GDP as the sum of real GDP and inflation. If real growth falls, the central bank would thus have to drive up inflation. Conversely, if real growth rises, the central bank would have to bear down on inflation much harder than it would do under the pure inflation targeting regime used by central banks such as the ECB.

.   .   .

It was probably inevitable that this long-lingering clash of economic cultures has finally come out into the open. As Europe’s recession gets worse, the ECB will soon have to adopt similar measures to those used by the Fed. It may even end up adopting a nominal income target, explicitly or implicitly, for the simple reason that the crisis in the eurozone is ultimately insoluble without annual nominal growth of at least 5 per cent. And I cannot see the Bundesbank support for any of it.

Nearly 4 years ago I and a few others started arguing that the crisis was being misdiagnosed by the economics establishment.  Market monetarists argued that while banks did make some foolish loans, the deeper cause of the global financial crisis was a lack of nominal income; the resource that people, businesses, and governments have available for repaying nominal debts.  The collapse in nominal income in the US and Europe was larger than anything since the 1930s, and hence most pundits and policymakers had no experience dealing with this situation.

It’s amazing how far we’ve come in less than 4 years.  NGDP is the hottest idea in macroeconomics, and the lack of NGDP growth is seen as the root cause of the financial crisis.  I recall in 2009 how commenters were incredulous when I said “NGDP,” not reckless banking, was behind the financial crisis.  They thought I was crazy.  Now it’s practically conventional wisdom.  This means that all those “policy implications of 2008” from both the left (who blamed the banks) and the right (who blamed the regulators) will have to be completely re-thought.  It’s about time.

HT:  JimP

PS.  I finally figured out how to type an umlaut—a sign of my respect for Mr. Münchau.


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52 Responses to “How far we’ve come”

  1. Gravatar of Benjamin Cole Benjamin Cole
    24. September 2012 at 18:54

    Kudos to everyone in the MM movement, of course including Scott Sumner.

    The blogosphere—who would have thunk it, even 10 years ago?

    Now let’s focus on getting the Fed to lower IOR, and maybe start thinking about proper democratic governance of the Fed.

    If the Fed accumulates large balance sheets, the proceeds of which are transferred to the Treasury Department, should the Fed remain “independent”?
    Really? Should not democracies favor transparency and accountability?

    Do democratic ideals transcend certain economic ideals, such as the now-hallowed notion that central banks must be independent?

    If we have the Department of Defense run by a popularly elected US President—with its horrible and often misused arsenal—can we really then say, “Oh, but central banking is much too delicate to be left in the hands of the public.”

    Interesting questions….

  2. Gravatar of Major_Freedom Major_Freedom
    24. September 2012 at 19:03

    “You can think of nominal GDP as the sum of real GDP and inflation.” – Wolfgang Münchau

    Perhaps you can tell ol’ Wolfie that it is difficult to envision

    [real GDP = computers + apples + … + electrons] + [inflation = new money created] = NGDP

    unless there is a common ground between real goods and money such that one can be added to the other to get a third singular quantity.

    The equation typically cited by market monetarists: RGDP + inflation = NGDP, is at fault. It is incoherent, if RGDP means real goods and services, not what NGDP was in the past.

  3. Gravatar of JimP JimP
    24. September 2012 at 19:12

    Benjamin

    Indeed so. Clearly monetary policy decisions are of critical importance to a democracy. Why should they be left to a group of unelected cb governors – especially when, as Scott notes, many of them have no idea at all what they are doing. The regional board members merely represent the local banks. Why is their voice more important than that of the nation as a whole?

  4. Gravatar of Major_Freedom Major_Freedom
    24. September 2012 at 19:35

    ssumner:

    “…the lack of NGDP growth is seen as the root cause of the financial crisis.”

    Incorrectly seen, since the housing market peaked in 2006 after which it collapsed, which was then followed by a financial crisis in 2007, and THEN there was a dramatic fall in NGDP in 2008.

    NGDP was growing at around 5% annualized when this happened.

    In addition, construction jobs peaked all the way back in early 2006 and then declined, well before the fall in NGDP. Construction jobs are a good proxy for the housing market, which many of the problematic financial securities were based.

    The fall in NGDP simply isn’t the “root cause” of the financial crisis. The financial crisis is a proximate, but not root, cause of the fall in NGDP. The Fed wasn’t burning money. The demand for money rose and investment spending fell substantially before NGDP fell in 2008, and yet market monetarists want to interpret this not in a way that would promote questioning of why would people suddenly want to reduce their spending and increase their cash balances, but rather in a way that would promote questioning the Fed only, as if it is irrelevant why people would act in that way if the Fed doesn’t accelerate its money printing.

    The issue is one of timing.

  5. Gravatar of Major_Freedom Major_Freedom
    24. September 2012 at 19:48

    Growing NGDP does not necessarily raise the demand for houses specifically in a sufficient way so as to avoid a collapse in the market value of securities based on housing.

    A bank failure cannot be prevented if that bank has too many defaulting mortgage backed securities and other financial securities on its balance sheet while the demand for aircraft carriers or computers, say, rises on the basis of NGDP targeting.

    NGDP of 5% does not mean nominal demand for every good and every financial security rises by 5%.

  6. Gravatar of W. Peden W. Peden
    24. September 2012 at 21:06

    Major Freedom,

    How puzzling! It’s almost as if Münchau wasn’t using inflation in that sense.

  7. Gravatar of Saturos Saturos
    24. September 2012 at 21:25

    Ben, “democratizing” the Fed wouldn’t solve anything, just look at Arthur Burns. There’s a good reason for independence. But we need accountability as well. The way to do that is to tie them down to good explicit rules, like NGDPLT.

    Unfortunately the DoD has to be run by the president, that’s the whole point of a state, any state…

    The Fed wouldn’t have such large balance sheets if it were actually conducting monetary policy well. Say by NGDPLT.

  8. Gravatar of John S John S
    24. September 2012 at 21:42

    Bob Murphy has a reply to you–all centrally planned monetary policy suffers from the fatal conceit. From his latest post: http://consultingbyrpm.com/blog/2012/09/the-fatal-conceit.html

    There are lots of areas of scientific inquiry where the experts involved simply don’t understand the phenomenon very well. If, say, some physicists approached Congress and asked for $40 billion per month to fund the development of a cold fusion reactor, and Congress said, “How much total money do you need?” and they said, “Until we get it right,” that would be alarming.

    These physicists could still be the world’s experts on the processes involved. The critics in Congress and the public who thought the $40 billion monthly funding wasn’t justified wouldn’t have to prove they knew the physics better, nor would they have to perform better on a prediction of how subatomic particles would behave in experiments 6 months prior to the funding request. We could still imagine circumstances in which it would be perfectly correct, “rational,” and “scientific” to tell the physicists and engineers, “You guys have done pioneering work in these fields, but sorry, we just don’t feel you understand Nature enough to get this kind of funding right now.”

  9. Gravatar of libertaer libertaer
    25. September 2012 at 01:19

    Münchau is also a columnist for the most visited German online news website “Spiegel online”. It will be interesting if he presents NGDPLT in his column tomorrow. In Germany you need some guts to do this.

    By the way, as a German there is one thing I always wanted to ask here: are there any data or personal experiences on the ancestry background of Ron Paul-, hard money-, Tea Party-, Inflationphobia-supporters in the US? Could it be that a high percentage is of German ancestry?

    Major Freedom, do you have German ancestry?
    If so, it wouldn’t be your fault, it’s in your genes.
    🙂

  10. Gravatar of Britmouse Britmouse
    25. September 2012 at 01:27

    FT Economics Editor Chris Giles has done two articles advocating for NGDP level targeting too, as has Martin Wolf. The FT are fully signed up 🙂

  11. Gravatar of Jaap de Vries Jaap de Vries
    25. September 2012 at 02:27

    Congrats on the progress. I have another question Scott. I remember you stating that Friedman argued that the money supply is not a good indicator for the stance of monetary policy. Do you have a paper in which he refers to this? I tried to find it but I couldn’t find it.

  12. Gravatar of To To
    25. September 2012 at 02:53

    @libertaer: “Münchau is also a columnist for the most visited German online news website “Spiegel online”. It will be interesting if he presents NGDPLT in his column tomorrow. In Germany you need some guts to do this.”

    He’s done worse.

  13. Gravatar of libertaer libertaer
    25. September 2012 at 03:32

    @To

    You are right. Münchau has already done it, 3 weeks ago! I missed that one. And he is advocating a NGDP target of 6%!

    At the end of the articel:
    “I personally would welcome a moderate increase in inflation, for example, at four per cent, or a nominal growth target of six percent.”

  14. Gravatar of Bob Murphy Bob Murphy
    25. September 2012 at 03:43

    Scott wrote:

    Market monetarists argued that while banks did make some foolish loans, the deeper cause of the global financial crisis was a lack of nominal income; the resource that people, businesses, and governments have available for repaying nominal debts.

    Scott, not that it’s your job in life to make sure I understand your position, but FYI it’s stuff like the above that made me confused when you criticized Garett Jones’ post about debts and sticky prices etc. It sure sounded like you were telling him that if anything, nominal debts would just make people work harder, whereas I knew that you cited nominal debts as a crucial reason that slow NGDP led to real problems, as you’ve done (once again) in this post. If you *don’t* think nominal debts are a big part of the story, can you see why this post today is a bit misleading?

  15. Gravatar of To To
    25. September 2012 at 03:54

    @Bob murphy:

    Yeah, that post the other day made me feel that SS had turned into a card-carrying supply-sider. Because these were supply-side arguments, right ?

  16. Gravatar of StatsGuy StatsGuy
    25. September 2012 at 04:08

    @JimP

    The critical question is whether money is a public or a private good. Sounds like a silly question, but it’s a bit more complicated if you start thinking about it.

    @Scott

    “the deeper cause of the global financial crisis was a lack of nominal income; the resource that people, businesses, and governments have available for repaying nominal debts.”

    I’m glad the issue of nominal debts is now foremost, rather than the issue of nominal wages. I would argue that the global accumulation of capital/wealth has made the debt issue relatively more important than the wage issue over time, and this trend will continue.

    http://krusekronicle.typepad.com/.a/6a00d83451b14d69e20105362d6456970c-400wi

  17. Gravatar of Saturos Saturos
    25. September 2012 at 04:30

    Bob, once again, sticky nominal debts and falling NGDP do cause real problems (financial crises), but they don’t explain mass unemployment at all. You can have recessions without mass unemployment. In fact that’s exactly what “Austrian” recessions would look like.

  18. Gravatar of bill woolsey bill woolsey
    25. September 2012 at 04:44

    Murphy:

    It isn’t so complicated.

    Imagine wages and output prices are perfectly flexible. Then the labor market always clears. An increase in real debt motivates people to work harder. The incease in labor supply lowers real wages enough so that all of the extra labor is hired.

    More labor input and more ouput.

    The drop in nominal expenditure on output raises employment and production without any increase in unemployment.

    I don’t think this story adds up entirely, because creditors are better off and might work less.

    And there is nothing desirable about these real transfers between creditors and debtors.

    But Sumner is especially intersted in making sure labor markets clear, and with money wages having a sticky trajectory, this means at best avoiding or at least reversing anything that would require a shift in the trajectory of wages. Stable growth in nominal GDP does a pretty good job of that.

    The nominal wages always adjusted to clear the labor market, then that would no longer be a concern.

  19. Gravatar of ssumner ssumner
    25. September 2012 at 06:51

    John S, What you and Bob don’t realize is that I oppose centrally planned money, and favor having the markets determine the money supply and interest rates.

    Bob, Read Saturos and Bill, They speaks for me.

    Jaap, Bernanke said money was a lousy indicator. Friedman favored money targeting until late in life, when he switched to inflation targeting.

    Also check out this post:

    https://www.themoneyillusion.com/?p=7022

    Statsguy, There’s no change in my views, as I’m sure you know. This comment of yours is very misleading:

    “I’m glad the issue of nominal debts is now foremost, rather than the issue of nominal wages.”

    My views haven’t changed one iota. Tight money causes unemployment, and worsens the financial crisis. I ‘ve said that from day one.

  20. Gravatar of Alex Godofsky Alex Godofsky
    25. September 2012 at 07:51

    I keep reading StatsGuy and Scott having the same debate (debt vs. wages) and it seems they keep talking past each other. Scott will mention the effect of poor monetary policy on debt and StatsGuy will pop in and say “so does this mean you agree now that sticky debt is the ‘real problem’?”. Then Scott says, no, sticky wages are the real problem.

    I think Scott’s model is that sticky debt is a transmission mechanism between falling NGDP expectations and falling NGDP – with sticky debt, falling NGDP expectations can cause radical increases in asset riskiness / drops in asset prices, which (via the wealth effect) causes people consume/invest less today, which then validates the reduced NGDP expectations. So when good monetary policy ‘fixes’ sticky debts, that’s good because it’s an intermediate step to fixing W/NGDP.

    In this model if wages weren’t sticky then sticky debt would be irrelevant, which is why sticky wages remain the ‘real problem’.

  21. Gravatar of Bill Ellis Bill Ellis
    25. September 2012 at 08:01

    Sorry if any one already posted this…

    EconoTrolls: An Illustrated Bestiary by Noah Smith…HT Krugman.

    http://noahpinionblog.blogspot.it/2012/09/econotrolls-illustrated-bestiary.html

    Soooo funny…And smart.

  22. Gravatar of Saturos Saturos
    25. September 2012 at 08:20

    Yes I caught the link on EconLog.

    How are supply shocks our secret weakness, they’re our special strength! When they enter the picture the case for NGDP targeting becomes even stronger. And of course the NGDP futures market is “obscure” and “highly illiquid”, seeing as it doesn’t exist yet.

    Scott will be pleased though that Noah admits we’ve practically won.

    He goes pretty low with the Republicans, disenfranchising Blacks? Didn’t Lincoln emancipate them?

    The MMT bit had me in stitches though.

    Was the blank image for “how the world sees Marxists” intentional?

  23. Gravatar of Saturos Saturos
    25. September 2012 at 08:21

    Ohhhh my God, I didn’t even see the last one! Noah has really been reading this blog! Hilarious!

  24. Gravatar of libertaer libertaer
    25. September 2012 at 08:27

    @Alex Godofsky

    “In this model if wages weren’t sticky then sticky debt would be irrelevant, which is why sticky wages remain the ‘real problem’.”

    I don’t get why sticky debt would cease to be a problem if only wages/prices were flexible? If all wages/prices would be cut in half, but debt remains sticky, wouldn’t asset owners still feel poor? Their balance sheets would still be under water. The real debt burden would be even worse.

  25. Gravatar of Saturos Saturos
    25. September 2012 at 08:28

    MF, please go and comment on Noah’s blog for a bit, I’d love to see you make a cameo.

  26. Gravatar of Saturos Saturos
    25. September 2012 at 08:34

    Make sure you read the comments too – there’s a bit on Krugman. And Gene Callahan’s sour grapes cracked me up as well.
    Also, the bit on Republicans is even funnier when you remember that Laffer isn’t even dead (and that Noah’s writing it).

    And as Ryan points out, the pyrite joke is … golden.

  27. Gravatar of Saturos Saturos
    25. September 2012 at 08:35

    Can someone help me assemble a “best of” Major Freedom comments to send to Noah? I’ve already petitioned him for inclusion in the comments.

  28. Gravatar of Saturos Saturos
    25. September 2012 at 08:42

    Can people here come up with funnier ones for MM?

  29. Gravatar of Greg Ransom Greg Ransom
    25. September 2012 at 08:44

    I forget. Does the Scott Sumner NGDP future market policy proposal explain why this happened?

    “The collapse in nominal income in the US and Europe was larger than anything since the 1930s.”

  30. Gravatar of Saturos Saturos
    25. September 2012 at 08:49

    I think he’d acknowledge that there was a feedback loop with the growing financial crisis, exacerbating the problem, whilst the Fed was backward looking, distracted by headline inflation spikes and then misled by low interest rates.

  31. Gravatar of Saturos Saturos
    25. September 2012 at 08:49

    Excerbating the excess demand for money problem.

  32. Gravatar of Adam Adam
    25. September 2012 at 09:04

    Pet peeve: NGDP is not real GDP plus inflation. It’s actual measured GDP. Real GDP is NGDP minus some estimate of inflation. Every little about it is “real” except the concept.

    Not sure why that bothers me so, but it does.

    As for whether reckless banking was “the problem,” my gloss on Sumner is that it doesn’t really matter what “the problem” was (i.e., what started the shock), what matters is whether it’s countered with policy or not. Thus I’d still say that reckless banking was part of what caused the shock that lend to a fall in NGDP (via increased demand safe assets and/or base money), and thus part of “the problem” even if the Fed could and should have offset it.

    But not being an economist, I’m sure I muddled much of that.

  33. Gravatar of Mark A. Sadowski Mark A. Sadowski
    25. September 2012 at 09:05

    Scott,
    1) Eli Dourado has a response to his critics:

    http://elidourado.com/blog/replies-to-my-critics/

    2) With respect to Noah Smith’s Troll Bestiary (mentioned by Bill Ellis/Saturos above):
    a) Am I one of Qin Shi Sumner’s terra cotta graduate students?
    b) Noah describes MM’s weakness as “supply shocks”. I think that, at the very least, deserves a brief (if good humored) response.
    c) I’ve always considered Morgan Warstler Uncategorizable myself, and yet now he has his own category. Go figure.

  34. Gravatar of Saturos Saturos
    25. September 2012 at 09:08

    Mark, I posted Eli’s post earlier on another page, and pointed out that it didn’t address all of Bill Woolsey’s earlier rebuttal. I also left a few comments on the Troll Bestiary

    And there are worse things than being immortalized terracotta…

    Adam, NGDP is just total money-spending. And Scott once argued that there’s no such thing as inflation, and hence no such thing as RGDP…

  35. Gravatar of BluerKindofWhite BluerKindofWhite
    25. September 2012 at 09:39

    Scott,

    What I’ve always found more interesting about your NGDP futures targeting proposals, rather than necessarily NGDP targeting itself, is having markets determine monetary policy rather than arbitrary discretionary decision making by a central bank.

    In regards to interest on reserves, I had a question: what if the Fed announced a fixed $ amount of interest to be paid on reserves, regardless of how much was actually invested? In this scenario, markets determine the short rate, since banks decide how much to deposit with the Fed (and thus, the denominator under the fixed $ interest payment, and thus, the rate). Then, deposits at the Fed are allocated so that the risk free short rate fulfills the short rate demanded by the market, and the Fed no longer has to announce changes to interest rates.

    I haven’t thought through this too deeply, especially in regards to how big/small the fixed $ amount would have to be and any potential zero lower bound problems, but does this seem like an effective policy?

  36. Gravatar of Adam Adam
    25. September 2012 at 09:40

    Saturos – I was not aware that Scott made that argument. I suspect I would have liked it.

  37. Gravatar of StatsGuy StatsGuy
    25. September 2012 at 10:40

    @ Bill

    ROFL X Infinity

    Shades of Morgan…

  38. Gravatar of Alex Godofsky Alex Godofsky
    25. September 2012 at 10:47

    @libertaer:

    I don’t get why sticky debt would cease to be a problem if only wages/prices were flexible? If all wages/prices would be cut in half, but debt remains sticky, wouldn’t asset owners still feel poor? Their balance sheets would still be under water. The real debt burden would be even worse.

    If wages/prices were perfectly flexible then yes, they would feel poor, but that wouldn’t cause unemployment. If spending fell, the prices would fall in lockstep, and the total quantity of goods and services produced would stay the same.

  39. Gravatar of StatsGuy StatsGuy
    25. September 2012 at 11:01

    @ Scott/Bill/Alex

    I’m really not trying to be a twit. I get the trasmission mechanism/real issue is W/NGDP argument. I also get Bill’s argument: “The drop in nominal expenditure on output raises employment and production without any increase in unemployment.”

    The presumption here is that everything clears if wages clear. This argument rests on some assumptions, not unlike those made in arrow/debreui models – immortality and infinite credit lines.

    The fact is that many people – particularly as we move toward great levels of automation, have a net present (economic) value to society that is negative, and/or a net present (financial) value in terms of wealth. In other words, they are so deep in debt and their nominal earning power (even if wages clear perfectly) is so low that they can never pay it off, and must continually borrow (or receive public support) to stay alive. You can call this absurdist marxism, but it’s quite real:

    http://thecnnfreedomproject.blogs.cnn.com/2011/03/08/generations-pay-off-debts-through-slavery/

    The US is spared from this largely due to crazy ideas like bankruptcy law (which was recently revised to be less consumer friendly), and public support.

    So I continue to think that nominal debt is more than merely a transmission mechanism (operating through perceived asset risk). Moreover, I can easily construct a scenario where debt (or formal) slavery is in the interests of dominant powers but not in the interests of the whole (and not even in the interests of the dominant powers if you project out far enough into the future with a low enough discount rate).

    This scenario looks a lot like the South in 1860.

  40. Gravatar of StatsGuy StatsGuy
    25. September 2012 at 11:04

    By the way, if you are trying to tell most people why NGDP targeting is a good idea, the argument that

    “NGDP targeting let’s us cut real wages”

    is a lot less compelling than

    “NGDP targeting lets us increase real spending power”

  41. Gravatar of James in London James in London
    25. September 2012 at 12:44

    You can of course blame the banks AND the regulators. The banks capture the regulators and you end up with a mess, where regulators act as a fig leaf for, or rather guarantor of, reckless behaviour by the banks. It is always thus with corporate statism. We are headed back there already.

    The mess created might even need a bit of short term counter-cyclical activism by the central bank, but such bailouts will probably embed moral hazard even more.

  42. Gravatar of James in London James in London
    25. September 2012 at 12:52

    “It’s about time” you put yourself in the shoes of the Fed at the time of the Lehman crisis and realised how out of touch they were with the huge size of the shadow banking sector. And that the 1930s provided no guide to dealing with modern financial leverage, complexity and systemic risk.

  43. Gravatar of ssumner ssumner
    25. September 2012 at 16:48

    Alex, The only reason sticky debt is a problem is that we taxpayers have to bail out Fannie and Freddie and FDIC and (soon) FHA. Otherwise it would not be a public policy problem at all.

  44. Gravatar of More Evidence That Scott Sumner Is Out of Touch More Evidence That Scott Sumner Is Out of Touch
    25. September 2012 at 18:07

    […] contracts played an integral role in the Sumnerian system? Well here’s Coach Sumner yesterday giving a pep talk to his team: Nearly 4 years ago I and a few others started arguing that the crisis was being […]

  45. Gravatar of John S John S
    25. September 2012 at 18:21

    “John S, What you and Bob don’t realize is that I oppose centrally planned money, and favor having the markets determine the money supply and interest rates.”

    I understand that you support market monetarism. However, in an ideal world, would you favor laissez faire Free Banking (a la White/Selgin) and the elimination of the Fed? Certainly, having a (de facto if not legal) monopoly on issuing currency, as the Fed has now, qualifies as centrally planned money, does it not?

  46. Gravatar of Saturos Saturos
    25. September 2012 at 19:25

    After reading Bob Murphy’s latest (why doesn’t he read the replies to his comments?) I am now going to start referring to Scott as “Coach Sumner”. Coach Sumner, do you think I’ll make the varsity squad someday???

  47. Gravatar of To To
    25. September 2012 at 23:45

    Paradox of toil, anyone ?

  48. Gravatar of libertaer libertaer
    26. September 2012 at 05:04

    @Alex Godofsky
    “If wages/prices were perfectly flexible then yes, they would feel poor, but that wouldn’t cause unemployment. If spending fell, the prices would fall in lockstep, and the total quantity of goods and services produced would stay the same.”

    I still don’t get it. Wouldn’t such a deflationary scenario lead to bankruptcies, deleveraging, money hoarding etc…? Why invest if asset prices are falling while sitting on my money gives me a nice, positive and risk free real interest rate? With falling investments wouldn’t unemployment rise?

    Are Sumner and you really saying: even if wages/prices fall a thousand times (hyperdeflation), sticky debt wouldn’t cause any unemployment? The total collapse of all corporations and the whole financial industry wouldn’t cause unemployment if ony wages/prices are flexible?

  49. Gravatar of ssumner ssumner
    27. September 2012 at 05:37

    John, Not if the market controls the money supply.

    In any case the taunt “central planning” is just a cliche thrown around thinking by people who don’t want to think hard about public policy questions. The Libertarian Bible says laissez-faire is best, how dare anyone question that dogma!

  50. Gravatar of Major_Freedom Major_Freedom
    27. September 2012 at 07:21

    ssumner:

    John, Not if the market controls the money supply.

    Saying the market controls the money supply in a world with central bank controlled NGDP targeting is like saying the markets controls the supply of prisoners in a world with a state deciding to send people to prison when they observe them doing X. “The state is not actually deciding how many people to send to prison. That is decided by the people, who can do X whenever they want and wherever they want. It’s just that the state will ‘accommodate’ their activity by increasing their arrests when they observe more people do X, and decreasing their arrests when they observe fewer people do X.”

    A system where the state acts in a certain way when they observe other people act in a certain way, and the state changes their actions when they observe different actions from the people, does not mean that the people are deciding the state’s actions. Since the state is not being coerced by the people, individual action from statesmen is decided by the individual statesmen themselves. Since inflation requires action from money printers, the responsibility for the money printing goes to the actor or actors who in fact print the money, not those who behave in a particular way such that the money printers change their actions.

    The market does not decide 5% NGDP growth. The state does. The market does not increase the supply of money faster or slower than before. The state does. Just because the market actors have a particular money and spending preference that results in a particular NGDP during any period of time, it does not mean the market is ordering the central bank to print more or fewer dollars. It’s all the Fed. There is no market!

    The only way that the market process can be viewed as deciding the money supply is if the existing money monopoly is abolished, decentralized, is produced in a competitive market, such that the market controls the money supply and hence NGDP.

    In any case the taunt “central planning” is just a cliche thrown around thinking by people who don’t want to think hard about public policy questions.

    That’s right. Libertarians do not want to think about how to centrally plan society, they want to think about how to eliminate central planning and show why it is morally repugnant, economically destructive, and contrary to principles of a free society.

    The term “central planning” has a very specific and clear meaning that refers to very specific and clear human activity. It isn’t “thrown around” by thinking people. Thinking people correctly identify NGDP targeting as central planning in the area of money production because in that activity, there is no free market competition in money production, but rather the means to produce money are owned and controlled by a state, similar to how the old Soviet state owned and controlled the means to producing potatoes and cabbage.

    Their monopoly, just as the Fed’s, is based on coercion from the state, not on economically out-competing all other producers who are free to compete using their own property such that consumers have just come to freely choose the monopolist because they prefer its output over all other alternatives.

    The Libertarian Bible says laissez-faire is best, how dare anyone question that dogma!

    The Market Monetarist Bible says central bank nominal spending targeting is best, how dare anyone question that dogma!

    Anyone can play that game.

    —————-

    It’s interesting watching your reactions to the libertarian critique. You sound just like a far left-winger who is criticized for holding the view that the state should nationalize the banks and oil companies. They have the same “You’re a dogmatist!” reaction. Moreover, it’s also very weird to hear a Chicago School grad sarcastically say “laissez-faire is best!”, as if it’s not actually true and as if you don’t actually believe it is true.

    What happened there anyway? Was every economic grad, unbeknownst to you, drugged and kidnapped by a cabal of Fed financed socialists, then sent to an underground laboratory where they zapped your brain with anti-capitalist propaganda, after which you woke up not remembering what happened? That while you may shout the slogans about “laissez-faire!” this and that you picked up in the hallways, that nevertheless in the inner most recesses of your consciousness, you acquired a profound hatred for it, that should anyone actually advocate for libertarianism in, GASP!, money production, they are met with contempt and accusations of dogmatism?

    Seriously, who is the actual dogmatist here? The person obsessed with central planning of aggregate spending through state controlled money printing, or the person(s) who say such a thing is based on a mystical view of state power, and that just like no one individual can know what the “correct” supply of computers or potatoes ought to be, so too is it the case that no one individual can know what the correct supply of money and volume of spending ought to be, such that it is a dogma to believe that you or anyone else can in fact know? That the only way for anyone to discover the price of money, is if the means to producing money is decentralized and opened to competition according to individual private property rights?

    —————

    Or is this all really only a rather unfortunate position that monetarists have put themselves in as impressionable students, where you invested many years of studying central planning of money, that you have to throw everything but the kitchen sink at the critics who use similar arguments as you do to left wingers, so that you don’t have to admit that you invested in a loser?

    Maybe this is what libertarians mean when they say the old generation is a lost generation, and that the only hope to improve the world is through the next generation. So unbelievable rigid and fixated on your ideas, no matter what. And you call your critics “dogmatists”?

  51. Gravatar of Major_Freedom Major_Freedom
    27. September 2012 at 07:31

    To:

    Paradox of toil, anyone?

    Original paper here:

    http://www.newyorkfed.org/research/staff_reports/sr402.pdf

    “The starting point of this paper is the negative effect of labor income tax cuts, i.e., a cut in the tax on wages. These tax cuts cause deflationary pressures in the model by reducing marginal costs of firms, thereby increasing the real interest rate.”

    As you can hopefully see, the paradox of toil hypothesis is based on a flawed premise. Eggertsson fallaciously presumes that firms hoard the money they no longer spend on labor tax. It’s the old paradox of thrift making another ugly appearance.

    “The idea is that total employment will fall when wages, and therefore consumption, are pushed down by the simultaneous efforts of everyone to work more in situations where interest rates are against the zero bound so that rates cannot drop more to increase demand for goods.

  52. Gravatar of Scott Scott
    6. October 2012 at 17:51

    I find the graphs pointed to by Major_Freedom pretty compelling:
    /—
    NGDP was growing at around 5% annualized(1) when this happened(2).
    (1) http://research.stlouisfed.org/fredgraph.png?g=b1i
    (2) http://i.imgur.com/s549m.png
    \—

    At first blush, I agree pretty much completely with Adam:
    /—
    Adam
    25. September 2012 at 09:04

    As for whether reckless banking was “the problem,” my gloss on Sumner is that it doesn’t really matter what “the problem” was (i.e., what started the shock), what matters is whether it’s countered with policy or not. Thus I’d still say that reckless banking was part of what caused the shock that lend to a fall in NGDP (via increased demand safe assets and/or base money), and thus part of “the problem” even if the Fed could and should have offset it.
    \—

    Though I’m having a hard time squaring that NGDP graph with this from the NYFed that says aggregate house prices rose $6T from 2000-2008:
    http://www.newyorkfed.org/research/national_economy/householdcredit/DistrictReport_Q22010.pdf (page 3)

    Is SSumner’s position that the $6T isn’t represented in Major_Freedom’s NGDP graph, and that a proper graph of NGDP would have shown the housing bubble early, and in response the fed would have tightened appropriately? (Or rather, the market would have tightened in response to the graph, via the Fed’s infinite-quantity buy/sell point at n%?)

    Curious how AIG’s infinite-CDS-issuing monkey would fit into this model as well.

    Interesting stuff!

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