Ideas matter

Britmouse sent me some interesting articles from the UK.  Here’s support for NGDP targeting from the left-wing Guardian:

This is the truth that cannot speak its name: as a senior financial policy official told me, even to raise it at home or abroad merely as an issue for debate is to invite universal disapproval. But truth must be faced. Britain should provide a lead – both for its own economic fortunes and to set the new international standard. As a minimum it should announce a new programme of quantitative easing, in effect printing money; insist the Bank of England uses the money it prints to buy the broadest range of private debt; and immediately replace the 2% inflation target with a target for the growth of money GDP – so getting Britain off the hook of its unpayable private debts.

And here’s support from the right wing Telegraph:

The Bank of England denies it, of course, but for a long time now it has been obvious that what the Bank is targeting is not inflation as such, but nominal GDP. Further evidence of this comes from the latest letter the Governor of the Bank of England, Sir Mervyn King, has been forced to write to the UK Chancellor, George Osborne, explaining why UK inflation is so much above target.

In the letter, he laboriously goes through the old arguments about how above target inflation is not really the Bank’s fault – it’s all down to higher commodity and import prices in combination with January’s hike in VAT. But for those factors, he reiterates, inflation would in fact be somewhat below target. But hold on. What’s this?

“There is, however, a limit to what monetary policy can do when large real adjustments are required. And it cannot influence inflation over the next few months. But it can ensure that the adjustment takes place against a backdrop of low inflation in the medium term. In so doing, monetary policy will make the best contribution it can to high and stable levels
of growth and employment.”

This is as clear a statement as I’ve yet come across that the Bank is prioritising growth over inflation. If the purpose is to erode the real value of the debt overhang, then plainly the policy is working. Growth is by convention usually expressed in terms of real increases in output – that is adjusted for inflation. For the UK, this has been pretty much flat over the last nine months.

Yet thanks to inflation, the nominal value of output has infact been growing quite sharply at approaching 5pc. Our nominal GDP growth is high by comparison with most other advanced economies, which helps explain why the downturn’s impact on employment hasn’t been so bad, considering the depth of the downturn.

Why can’t we have such enlightened right-wingers?   Because unlike in Britain, they aren’t in power in the US.   You just wait, as soon as Perry is president the treasonous WSJ will start beating the drums for monetary stimulus, just as they did in 1984 when Reagan was President and inflation was 4%.  (Inflation has averaged 1% over the past three years.)

It took the US 18 months to figure out what to do after Britain left the gold standard and Sweden began price level targeting in 1931.  Look for sensible policies to begin in late 2012—right after election day.

To get serious for a moment, it’s gratifying to see the quasi-monetarist NGDP targeting proposal really starting to attract attention.  When the FT asks:

Anyone for Fed targeting of nominal GDP futures?

. . . with the implicit understanding that readers will get the reference, you know we’ve arrived.


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78 Responses to “Ideas matter”

  1. Gravatar of david david
    18. August 2011 at 18:40

    … the gradual encroachment of ideas …

    Too bad about the vested interests bit, though, which still appears to be holding sway.

  2. Gravatar of marcus nunes marcus nunes
    18. August 2011 at 19:08

    Yes!
    http://www.youtube.com/watch?v=–8Ju1jb8Bw

  3. Gravatar of Nick Rowe Nick Rowe
    18. August 2011 at 19:24

    You do seem to be slowly winning Scott. Quite impressive really.

    Hey! I was just about to tease you about your bio “You will notice I am not a natural blogger…” and noticed you’ve changed it!

  4. Gravatar of Neal Neal
    18. August 2011 at 19:47

    Are there any trends in this blog’s traffic patterns over the last year or eighteen months?

  5. Gravatar of Hal Morris Hal Morris
    18. August 2011 at 19:50

    “… Because unlike in Britain, they aren’t in power in the US”. Yes, and civilization will end unless they wrest power from the current administration. If McCain had won he might well have gotten the equivalent of “ObamaCare” in a heartbeat (though I don’t want to think about what else might have happened).

    Maybe if someone could explain what money is, in a way that most people can understand, and how it is partly a function of public confidence, something the right has worked so hard to destroy.

    http://therealtruthproject.blogspot.com/2011/08/republican-anticonfidence-game.html

  6. Gravatar of Morgan Warstler Morgan Warstler
    18. August 2011 at 19:51

    We’re getting closer!!! Good for you Scott.

    Now if you can say the same thing…

    “Why can’t we have such enlightened right-wingers? Because unlike in Britain, they aren’t in power in the US. You just wait, as soon as Perry is president the treasonous WSJ will start beating the drums for monetary stimulus, just as they did in 1984 when Reagan was President and inflation was 4%. (Inflation has averaged 1% over the past three years.)”

    But you can say it more HONESTLY…

    IF Obama had not tried to to exploit a “crisis of capitalism”… and instead delivered Clinton II.

    The QE that came would have come to cover up Obama creating WORKFARE to end UI and Minimum Wage.

    The QE would have come to smooth over the cuts to public employees.

    Then Obama would have bought himself the kind of Monetary policy THAT GOOD FISCAL POLICY DESERVES.

    Bad fiscal policy cannot morally be rewarded by the Fed, you can’t blame people who own stuff from being offended that Obama didn’t look out for them first.

    It is their country! If you think we’re going to BOTH tax and regulate the folks who own thing AND inflate away the value of the currecy…

    Well Scottie my boy, you haven’t been been a very good student of history!

    Who owns the Fed? Banks. Who owns and runs banks? Who sat down with Clinton and changed his mind in January 1993 about “investing?” Who told Congress to lower taxes because the government can’t run a surplus?

    My god… just saying the word “Democracy” does not change what this country is and what it is about.

  7. Gravatar of Tomasz Wegrzanowski Tomasz Wegrzanowski
    18. August 2011 at 20:04

    > Why can’t we have such enlightened right-wingers?

    In terms of batshit insanity, British politicians are no match for American politicians. They may suck in many other ways, but there are no total fucktards like Perry or Dubya here.

  8. Gravatar of Lorenzo from Oz Lorenzo from Oz
    18. August 2011 at 20:18

    I have had a bit of a “penny drop” moment (and apologies if this has been blindingly obvious to other folk) which fits in with the title of the post.

    I do not like the Austrian concept of “malinvestment” because what is or is not a good investment depends on larger economic conditions. What is a great idea in New York may be a really dumb one in Port-au-Prince. If you are going to make any sense of the notion of “malinvestment” it is that unwarranted monetary expansion misleads folk about the future path of economic activity. As conditions change, investments based on such unwarranted expectations are “exposed” and need to be liquidated to free resources to go to more valuable uses.

    But suppose one slides into (in compete contradiction of Austrian value subjectivism) the notion that being a “malinvestment” is an intrinsic quality of an investment. Then the level of economic activity become irrelevant to the level of “malinvestment”. So, you can happily advocate any amount of restrictive “adjustment” because the level of “bad investments” wasting resources is set.

    Conversely, if you understand that what is or is not a good investment depends on economic conditions, then driving down income expectations does not “release” resources, it increases (potentially considerably) what becomes a non-returning investment. Such restrictive adjustment is a “cure” which is, in fact, more of the disease. Thus does poor analytical terminology leads to bad policy thinking. And Austrian or quasi-Austrian thinking is much stronger in American conservatism than British (or Oz) varieties.

  9. Gravatar of StatsGuy StatsGuy
    18. August 2011 at 21:19

    So, you still defend Republicans as closer to libertarian principles?

    BTW, consider linking your observations to the trade surplus and cost of imports. If cost of imports rises (due to falling dollar), inflation eventually rises… which means the Fed compensates by tightening to reduce price inflation (which is actually just currency adjustment). The 2% inflation rule is an effective break on the speed of currency adjustment. It is a way to preserve current consumption at the expense of future consumption – exactly the opposite of what strong dollar folks think.

    IMO, no easing till oil is consistently in the low $70s. Next year may be easier, the composition of the Fed changes.

    Obama is an idiot. If Peter Diamond were on the committee, there would be some intellectual firepower. He didn’t recess appoint him; I wonder if he knows that he likely cost himself the election. I’m continually astounded by how terrible he’s been.

    Morgan – how well do you think your conspiracy of tea party power would have held up if Obama had even half a brain and one kahuna? Oh well…

  10. Gravatar of Morgan Warstler Morgan Warstler
    18. August 2011 at 22:53

    Stats,

    I’m not an emissary from conspiracy land. If you have ever taken a improv class, or not, one of the basic rules is “yes, and…”

    I’ve found this is a good way of getting unforced errors. Whatever the other guys thinks is true, you AFFIRM IT – but since they view it through a bias, play right into it.

    But over on my side of the world, nobody just thinks we can have QE right after Obama leaves.

    We’re just 100% sure the problem is structural because we just hired 16% more regulators and created Obamacare.

    There’s NO CHANCE our economy is functional. We’re a horny lot, and there is NOBODY in this bar that looks ok to sleep with.

    America cannot have 16% more regulators and Obamacare and not be viewed as broken. We can only see disease, not unhealthy living.

    The point is YOU SHOULD HAVE KNOWN in 2009.

    And if you don’t look at the current situation and think to yourself, “JESUS, we never should have done Obamacare… when we did that shit, we GUARANTEED there’d be no QE.”

    Then you really don’t want QE, you want Obamacare.

    And you can’t have both. And let’s be honest… you KNEW you couldn’t have both, right?

    I mean you guys are that smart, you realized when you bought Obamcare, that there’d be no QE, right?

  11. Gravatar of James in London James in London
    18. August 2011 at 23:04

    There has to be a social contract if you are going to play with the fire of monetary easing. Fiscal prudence. It is entirely right that monetary easing begins after 2012 elections if Republicans win on a platform of believable fiscal prudence. Of course, Obama and the Democrats could “get it” before then, but it has to be believable and acted upon.

    You also have to tame the banks and make them pay for their TBTF guarantees, and the bond market too. The current bunch of “country club Republicans” look to be owned by the banksters, which is almost as dangerous as Obama’s fiscal imprudence.

    Denmark has just dismally failed to make its banks pay for their irresponsiblity, and let it’s banks fund free to arbitrage the taxpayer again on a 100% state guarantee (any comments Lars on “Bank Package 4” ?).

  12. Gravatar of FT Alphaville » Further reading FT Alphaville » Further reading
    18. August 2011 at 23:18

    […] – It’s well past time to talk NGDP targeting. […]

  13. Gravatar of Rob Rob
    19. August 2011 at 01:39

    British politics is actually quite fertile ground for NGDP targeting at the moment. The government is committed to reducing fiscal spending in real terms (though not in nominal terms) and has staked its reputation on being able to do so without crashing the economy. The coalition (Conservatives and Liberal Democrats) nature of the government has effectively muzzled the hard-right wing of the Conservative party, which means no Perry-esque outbursts about debasing the coin of the realm or similar nonsense.

    Some government ministers are publicly indicating support for more QE (they need to be somewhat circumspect given the independence of the BoE, of course). Business Secretary Vince Cable has been the loudest voice in support of this: http://seekingalpha.com/article/281955-british-business-secretary-vince-cable-supports-more-qe-if-consumer-demand-remains-weak

    This comes as little surprise to me, as one of his special advisers is the same person who wrote this. Is it too early to start talking about the influence of “Sumnerism”?

  14. Gravatar of RebelEconomist RebelEconomist
    19. August 2011 at 02:31

    Don’t kid yourself, Scott. This has nothing to do with the merits of NGDP targeting, and everything to do with looking for intellectual cover for allowing higher inflation to relax the stresses in the UK economy associated with excessive debt, wages and asset prices, especially house prices, with the minimum of disappointment. I would not be surprised if the UK even formally adopted NGDP targeting during the present economic downturn, although I would expect it to be dropped later, when the economy picks up and NGDP targeting starts constraining real growth. In this, you have something in common with MMT and diverse other economists like Blanchard, Krugman and Rogoff who are, in their own ways, pandering to policymakers’ temptation to backslide on sensible commitments that have now become inconvenient. Any port in a storm.

  15. Gravatar of Paul Andrews Paul Andrews
    19. August 2011 at 02:38

    What we need is real growth, not nominal growth.

    Any tinpot dictatorship can create nominal growth, and accordingly, even supporters of this approach must agree that NGDP targeting alone will not fix the problems.

    And therefore supporters must state what additional constraints need to be put in place to prevent the possibility of an unsustainable ever-accelerating easing.

    In other words, if we tried NGDP targeting, what would the warning signs be that we need to stop?

    In my opinion any reasonable set of warning signs you could name are already flashing “STOP!”.

  16. Gravatar of W. Peden W. Peden
    19. August 2011 at 04:59

    James in London,

    I quite agree. The US should follow our lead and adopt a credible long-term fiscal strategy to get their deficit under control. VAT at 20% would help them a lot.

    Paul Andrews,

    The sign that it’s time to put on the breaks with NGDP targeting is when NGDP growth is expected to exceed trend. In that respect, it’s very similar to inflation targeting.

    Given that the US economy is flushing down the toilet at a rapid pace, I’m not convinced that stopping right now is a good idea. You’re likely to get sucked back further up the pipes.

  17. Gravatar of Scott Sumner Scott Sumner
    19. August 2011 at 05:06

    David, Vested interests or stupidity?

    Thanks Marcus.

    Nick, It’s still there, in the about tab on the right.

    Neal, It’s gone up since I returned in July, but that may be partly because I am doing more posts. Prior to my break I was at 3000 hits a day, now its about 5000.

    Hal, Our current problem is too much confidence in money, which is driving the falling NGDP expectations and lower bond yields.

    Morgan, We see the same facts, but have different value judgments.

    Lorenzo, The smarter Austrians like Hayek understand the danger of secondary deflation. Some of the pop-Austrians, however, don’t.

    Statsguy;

    “So, you still defend Republicans as closer to libertarian principles?”

    I don’t recall ever doing that. Is that how you’d interpret my Rick Perry post? I do think Mitt Romney is the most libertarian major candidate in either party, however.

    James, You said:

    “There has to be a social contract if you are going to play with the fire of monetary easing.”

    That would be true if I was proposing some new untried policy. Instead I propose the Fed continue to adhere to its dual mandate, just as it did from 1983-2007. The Fed tightened sharply in 2008–I just want a stable monetary policy. No social contract is required for having them continue a monetary policy that was relatively uncontroversial for 25 years.

    rob, That’s very interesting information. BTW, is the “freethinking economist” anonymous? If so, how do you know he advises the government?

    Rebeleconomist. In case you didn’t notice, inflation targeting failed. I’ve been proposing this since the 1980s, and I think I’ve been proved right. Is it any surprise that when a policy fails people look around for a more robust policy that works well in both booms and recessions? If NGDP is adopted, I don’t expect it to be abandoned in the next boom.

    Paul, We need to create and subsidize trading in an NGDP futures market. If we don’t do that, then you have to rely on all sorts of market indicators and forecasts. Certainly a TIPS spread about 4% on 5 year bonds would suggest money is way too easy. But I think we can do better than TIPS spreads.

  18. Gravatar of Morgan Warstler Morgan Warstler
    19. August 2011 at 05:09

    DeKrugman tells us all to be like Europe!

    http://www.nytimes.com/2010/01/11/opinion/11krugman.html?adxnnl=1&adxnnlx=1313755990-RC4rTKwuEFKQKP4A4D0wQw

    Every time you align your thinking with DeKrugman, rather than draw deep deep lines between you… you tacitly support this idea.

    And ideas matters.

  19. Gravatar of Morgan Warstler Morgan Warstler
    19. August 2011 at 05:13

    “I do think Mitt Romney is the most libertarian major candidate in either party, however.”

    As a libertarian I don’t think ANY libertarian can make this statement.

    Personally, I think at this point, libertarians HAVE TO vote for whoever will deliver the most on States’ Rights.

    Scott, do you read Reason Magazine?

  20. Gravatar of johnleemk johnleemk
    19. August 2011 at 05:27

    Paul,

    Nominal and real growth are linked. Unnecessary contractions in the money supply relative to money demand HAVE REAL EFFECTS.

    Scott,

    More support from the right wing (albeit the part of the right wing which the Tea Partiers would probably denounce as RINOs — i.e. former Reagan advisers): http://politicalticker.blogs.cnn.com/2011/08/19/idiot-jab-lobbed-at-perry/

    *

    Bartlett said the politics at the Federal Reserve are a serious problem and in part blamed U.S. presidents, who he said have historically not focused their energies on the bank.

    “He [Obama] has had open seats on the fed almost his entire presidency and I think that this sends a signal that he just doesn’t care very much about what the fed does,” Bartlett said.

    *

    Morgan,

    Isn’t it a bit rich as a proponent of liberty to insist on your definition of libertarianism supplanting all others? And isn’t it a bit rich to push Perry as the states’ rights campaigner when he completely flip-flopped on states’ rights to pass their own legislation on marriage?

  21. Gravatar of Rob Rob
    19. August 2011 at 05:38

    Scott: he’s not anonymous, although maybe that’s only obvious to people who pay a bit too much attention to political/economics blogs.

  22. Gravatar of Doc Merlin Doc Merlin
    19. August 2011 at 06:46

    Scott, I have a serious question for you.
    If the fed was NGDP targeting over the last 12 months how would it have looked differently? I mean what exact actions would the fed do to increase NGDP that are haven’t already done. How exactly would it have looked differently from QE?

  23. Gravatar of johnleemk johnleemk
    19. August 2011 at 07:17

    Doc,

    I think Scott’s idea would be for the Fed to set up an NGDP futures market.

  24. Gravatar of Doc Merlin Doc Merlin
    19. August 2011 at 07:24

    @johnleemk
    ‘Doc,

    I think Scott’s idea would be for the Fed to set up an NGDP futures market.’

    Yes, I know that, but that doesn’t actually tell me anything. A futures market just gives us a prediction of NGDP. How does that turn into actual NGDP growth?

  25. Gravatar of johnleemk johnleemk
    19. August 2011 at 07:28

    Doc,

    Scott posted on this two years ago: https://www.themoneyillusion.com/?p=8136

  26. Gravatar of johnleemk johnleemk
    19. August 2011 at 07:28

    Oops, that should have been http://www.cato-unbound.org/2009/09/25/scott-sumner/from-discretion-to-futures-targeting-one-step-at-a-time/

    But the post I linked to is also a good read on the execution of NGDP futures targeting.

  27. Gravatar of James in London James in London
    19. August 2011 at 07:55

    No-one at the Fed in that long period had to ease (play with fire) like you want at the same time as having such a dysfunctional, pro-low taxes at the same time as being so pro-spending, government. That’s what’s different this time.

  28. Gravatar of Martin Martin
    19. August 2011 at 08:02

    Scott, are you familiar with Groenewegen’s essay in “Classics and Moderns in Economics Volume II” called “Unemployment and price stability: Aspects of the Marshallian legacy on the monetary economy”?

    p.221

    “More cautiously, he wished to establish a committee of experts to forecast industrial ‘storms’ and, more generally, ‘trade weather’ conditions, to use his metaphors. Most importantly, he desired official government publication of information on changes in the purchasing power of gold, combined with government assistance to facilitate fixed-units-of-purchasing-power contracts to safeguard the public against redistributive consequences of fluctuations in the price level, thereby removing a major source of business uncertainty (Marshall 1885: 77-81).”

    I have the idea that this is not too dissimilar from your position?

  29. Gravatar of Tyler Tyler
    19. August 2011 at 08:35

    Scott, I think it would be interesting if you did a post on the differences between the UK and the US. It seems that the UK, even though they’ve had relatively loose monetary policy, are still about 4% below peak output, while the US has almost surpassed peak output from 2007 (I think they’re still about 0.4% below) in spite of relatively tight money. Would it be possible for you to explain this? Does anyone know if this was due to the severity of the housing bubble in each respective country?

    I’m sure Krugman would delight in pointing out the size of the stimulus packages as an explanation (5.9% of GDP in the US vs. 1.5% of GDP in the UK).

  30. Gravatar of Morgan Warstler Morgan Warstler
    19. August 2011 at 08:44

    johnleemk,

    You misread Perry’s approach. States’ Rights first.

    Then if somehow the country decides they want to pass a Gay Marriage Amendment, they can. This is just a statement of fact.

    Are you upset Perry said he’d support the Amendment?

    I sure am, but since I don’t care enough to move out of Texas – if Texas passed such a law… I’m certainly not going to hold that against him enough to torpedo states’ rights.

    Gay rights is here to stay. If I thought States’ Rights would lead to slavery I wouldn’t support it either.

    And I do support and will support Gay Marriage for Texas.

    I LIKE that states’ rights is in our constitution, but I’m not an ideologue about it. I just think it is the best policy.

    This country needs to stop fighting over every single issue. There need to many kinds of places and Americans need to vote with their feet.

  31. Gravatar of Morgan Warstler Morgan Warstler
    19. August 2011 at 08:57

    johnleemk,

    Yes, yes, libertarians have no leader – yada yada.

    My biggest complaint with libertarians is their lack of pragmatism and guerrilla tactics (I can eve appreciate the Ron Paul supporter digging up dirt on Perry).

    Since there have been computer Bulletin Boards, I have been involved in libertarian pilpul, and I’ve got 20 years of listening to dogmatic and principled anger at theft in the name of the state.

    But we are not Quakers, we are not Ghandi. IF THERE IS THEFT, we are judged by what we will do to end it.

    Ultimately, we finally today have a crisis level debt situation that can weaken DC, and strengthen state governments.

    States’ Rights is the Free Market approach to Democracy.

    I firmly believe that this crisis was created indirectly on purpose by like-minded people – Ron Paul like to say “we’re broke.” I don’t think that happened exactly by accident, and I’m glad we FINALLY have a real shot of dialing the system back.

    Aren’t you?

  32. Gravatar of Doc Merlin Doc Merlin
    19. August 2011 at 11:15

    @ johnleemk
    I was there when he posted it. At the time we were all talking about ho wto actually set up the exchange. Thats not what I was asking.

    I was asking how he plans on getting the money into the economy, once he knows the target. Short term nominal Interest rates for customers are currently (barely) negative how does he plan on getting the money out, and how would it be different from QE? You really can’t just lower rates at this point, as there aren’t rates to lower. This means you have to do asset purchases, so, how would he do that?

  33. Gravatar of dirk dirk
    19. August 2011 at 12:14

    Was thinking about your post where you compared your dream where you promised your wife you wouldn’t play golf to the Fed committing to hit an inflation target. There’s a problem with the analogy: not playing golf still means you have to *do something* other than play golf. Your wife’s faith that you won’t play golf isn’t what prevents you from playing golf (even if it helps.) If the Fed commits to a higher inflation target, the market needs to believe the Fed is not merely sincere but also that it has the tools to meet the target. Imagine, for instance, that your promise to your wife was that you would play golf not that you wouldn’t. She would be more likely to believe you if you owned golf clubs, went out to the driving range to practice, and had a history of playing golf a lot. But if you never played golf, didn’t ever practice, don’t own golf clubs and didn’t have any friends who played golf your wife would be rightly skeptical that you would play golf even if you insisted that that was your plan. Likewise, in the case of the Fed their performance these past three years suggest they don’t own any golf clubs and perhaps can’t even swing a golf club. So if tomorrow they were to announce that the policy going forward was to play a bunch of golf, the market would rightly be skeptical that they would carry through with this promise. To convince the market now, the Fed needs to 1) announce their intention to play golf (hit an NGDP/inflation target) AND 2) show off their flashy TaylorMade’s in public, go to the driving range in public and hit the ball 300 yards a few times, and then sink a few puts on the green (take some form of action that demonstrates they can move NGDP in the direction they want it to.)

  34. Gravatar of Alex Hoopes Alex Hoopes
    19. August 2011 at 12:33

    It’s good to hear that the UK and its opinion leaders are more strongly embracing the notion of NGDP targeting. But I am curious as to why Scott believes that this will fundamentally influence the inflation hawks at the Fed, or a Republican Party that appears to be hellbent on embracing Deflationism as an ideology.

    I am inclined to believe the WSJ will support monetary stimulus, but I fear a President Romney would have too strong a reputation as a “flip-flopper” to meaningfully deviate from Republican orthodoxy without provoking a rebellion from the Republican Congressional caucus. And I’m not sure I trust the other likely Republican nominees (Perry included) to understand the necessity of monetary stimulus, or to enact a version of it in any way.

    I certainly hope I’m wrong, given that I’m very young, marginally employed, and desperately fearful of being part of a Japan-style “lost generation”, but I’m very, very skeptical of the notion that I am.

  35. Gravatar of Scott Sumner Scott Sumner
    19. August 2011 at 16:47

    Morgan, I subscribe to 3 magazines, The Economist, Reason, and The New York Review of Books.

    Johnleemk, I agree with Bartlett.

    Rob, Thanks for the link.

    Doc Merlin, It’s hard to say. They might have needed to do more QE, but more likely they would have done less. The commitment itself is highly expansionary (assuming level targeting.)

    James, I don’t see what difference that makes (for monetary policy.)

    Martin, Actually it’s different. I’m trying to get a monetary policy that would make those sorts of indexed contracts unnecessary.

    Tyler, I don’t accept Krugman’s methodology on stimulus. He praised Gordon Brown’s policies (which created gigantic deficits.) So it’s a bit late in the day to complained they didn’t do much stimulus. They did.

    I’m no expert on the UK, but in other posts I’ve argued they have worse supply side problems than the US. Government spending soared under Brown, from about 37% to 50% of GDP, if I’m not mistaken. That hurt the supply side. I’m also not sure they’ve done more monetary stimulus than the US. How much has NGDP risen in each country since 2007?

    drik, You said;

    “Likewise, in the case of the Fed their performance these past three years suggest they don’t own any golf clubs and perhaps can’t even swing a golf club.”

    I can’t understand how people can make that claim. The Fed itself insists it’s not out of ammunition. IT’S NOT TRYING TO RAISE INFLATION. So why is anyone disappointed that it has “failed.” DeLong asked Bernanke “how about 3% inflation.” And Bernanke said it was a bad idea. I think Fed policy has been a smashing success, in their own terms. They say they are opposed to inflation above 2%, and they’ve done a good job in keeping it down. Core inflation hasn’t hit 2% in 3 years. If the Fed said it was trying to inflate, but didn’t know how, then I’d start to get worried. But the Fed has succeeded in doing exactly what it claims it wants to do. So why the pessimism?

    Of course I’m exaggerating a bit, they were concerned when core inflation fell to 0.6% in 2010, but QE2 quickly pushed it higher. The problem isn’t that they lack the right tools, it’s that they have the wrong target.

    Alex, You are right that it’s a long shot. But at least we are starting to change minds. I honestly don’t think the payoff will come until the next recession. I really wish I’d had gotten going earlier. I would have been screaming in September 2008. I would have pointed out that IOR was a potential disaster. If the blog was already well read, perhaps these ideas might have been debated back then, and the Fed might have behaved differently. But there was almost no one making that case in the fall of 2008, except perhaps Beckworth, I wasn’t reading blogs yet at that time.

  36. Gravatar of Mark A. Sadowski Mark A. Sadowski
    19. August 2011 at 17:05

    Scott wrote:
    “Morgan, I subscribe to 3 magazines, The Economist, Reason, and The New York Review of Books.”

    Oddly, I never subscripbed to the Economist, but I did subscribe to the other two. No doubt Morgan will be suprised by one of those subscriptions.

  37. Gravatar of Richard W Richard W
    19. August 2011 at 17:48

    “…under Brown, from about 37% to 50% of GDP, if I’m not mistaken. ”

    You keep quoting 50% public spending. Before the recession as a % of GDP, the highest public spending reached was 41.3%. Even in the midst of the recession the figure reached 47.5%, compared to the 48.1% during the early eighties recession under Mrs Thatcher.

    https://spreadsheets.google.com/pub?key=phNtm3LmDZENC3I0s7AvHBQ

  38. Gravatar of Paul Andrews Paul Andrews
    19. August 2011 at 18:32

    “Paul, We need to create and subsidize trading in an NGDP futures market. If we don’t do that, then you have to rely on all sorts of market indicators and forecasts. Certainly a TIPS spread about 4% on 5 year bonds would suggest money is way too easy. But I think we can do better than TIPS spreads.”

    So in effect you are not recommending pure NGDP targeting. You are recommending NGDP targeting until and unless inflation exceeds a certain level. What then?

    (And surely any selection of market indicators and forecasts is somewhat arbitrary? e.g. TIPS only references CPI, with its statistical vagaries, and omission of asset price inflation/deflation.)

    There is a danger in assuming that a low CPI indicates all is well. A low CPI could be consistent with runaway private deleveraging coupled with runaway public leveraging (with one canceling out the other in the CPI).

    Reliance on CPI as a health indicator may be one of our biggest mistakes, as it is masking an underlying artificial inflation.

  39. Gravatar of Paul Andrews Paul Andrews
    19. August 2011 at 18:46

    @johnleemk: “Nominal and real growth are linked. Unnecessary contractions in the money supply relative to money demand HAVE REAL EFFECTS.”

    I agree, they are linked, and contractions have real effects. I don’t think anyone can say exactly how they are linked however. Short term pain may result in long term gain.

    It is clear that excessively loose money leads to asset bubbles. We’ve had this for the last couple of decades.

    The answer to this problem is not more loose money in the name of nominal growth.

  40. Gravatar of Martin Martin
    19. August 2011 at 23:51

    “Martin, Actually it’s different. I’m trying to get a monetary policy that would make those sorts of indexed contracts unnecessary.”

    Scott, If I am not mistaken you are actually providing such contracts, however your idea is of doing this through an open exchange?

    Marshall, like Friedman and I believe also you, divided the world into “Price theory” and “Monetary theory” where for the former he assumed Say’s law to hold (this is the first volume of his principles). The contract proposed by him were his way of making it hold. This and the provision of information.

    I see your proposal as combining the provision of said contracts with providing the information. Hence I find them to be not too dissimilar.

  41. Gravatar of james in london james in london
    20. August 2011 at 04:24

    If the misallocations within the economy, explicit and implicit leverage, over the past 10 years are not addressed then merely smoothing over the issues via Sumnerian monetary policy will not be enough to heal the economy. History will repeat.

    Hence, the need for a contract: less leverage and fiscal prudence in return for monetary aid. As many of your commentators, and you also, have pointed out, that is the “deal” in the UK. It hurts a bit, but it is necessary.

  42. Gravatar of OGT OGT
    20. August 2011 at 08:17

    I don’t quite get this part in the Telegraph in relationship to your model:

    Growth is by convention usually expressed in terms of real increases in output – that is adjusted for inflation. For the UK, this has been pretty much flat over the last nine months.

    Yet thanks to inflation, the nominal value of output has infact been growing quite sharply at approaching 5pc. Our nominal GDP growth is high by comparison with most other advanced economies, which helps explain why the downturn’s impact on employment hasn’t been so bad, considering the depth of the downturn.

    As I had understood you, stabilizing NGDP should also stabilize Real GDP. You often dispute the implication that fiscal policy effects real GDP, by moving G – T, while monetary policy primarily effects inflation. The telegraph seems to be claiming the BOE is not affecting real growth, but yet is somehow affecting employment. How does this fit with your analysis?

  43. Gravatar of W. Peden W. Peden
    20. August 2011 at 09:02

    OGT,

    Presumaby, the Telegraph is saying that- if NGDP growth wasn’t being kept up- the fall in RGDP growth would be even worse.

  44. Gravatar of Scott Sumner Scott Sumner
    20. August 2011 at 14:27

    Mark, The Economist is really a great magazine.

    Richard, I’ve seen tables that show UK public spending exceeding 50% of GDP, but perhaps those tables were wrong. In any case public spending as a share of GDP should fall during booms, and Brown increased it from 37% to 41% during a boom. That leaves you no room for adjusting to the next recession. He should have looked to Singapore, which runs huge budget surpluses during the boom years.

    Regarding Thatcher–the trend under Thatcher was downward–under Labour it was upward.

    Paul, You said;

    “So in effect you are not recommending pure NGDP targeting. You are recommending NGDP targeting until and unless inflation exceeds a certain level. What then?”

    You misunderstood me. I am advocating pure NGDP futures targeting. What I meant was if we don’t have it, then you look at other indicators like TIPS spreads and bond yields to estimate expected NGDP growth.

    Martin, You are still misunderstanding my position. There is a big difference between using NGDP futures contracts to try to stabilize NGDP, and the alternative policy of letting NGDP fluctuate, then indexing wages, rents, etc., against changes in NGDP (or inflation.)

    James, What you don’t understand is that monetary instability causes misallocation of resources. I’m trying to get a stable monetary policy, which will cause less misallocation. People say we built too many houses. Not true, the last decade saw a much lower than normal number of houses being built. The misallocation is that many houses are empty because the young people lack jobs to buy houses. I’m trying to get them jobs. Labor is better allocated in work, than sitting on the couch. Sitting on the couch will not solve any of the “allocation problems” in our economy. Only work will.

    OGT, That sentence is bizarre–I have no explanation.

    W. Peden, Maybe, but that’s a weird way to say it.

  45. Gravatar of Paul Andrews Paul Andrews
    20. August 2011 at 16:55

    “You misunderstood me. I am advocating pure NGDP futures targeting. What I meant was if we don’t have it, then you look at other indicators like TIPS spreads and bond yields to estimate expected NGDP growth.”

    I was referring to the latter. You are saying that if an NGDP futures market is not feasible your next best solution involves looking at other indicators. This is not pure NGDP targeting. It involves looking at some arbitrary measures in as-yet-unspecified ways. If it was fleshed out some more this would allow people to assess it in a way likely to yield better judgements about its efficacy or lack thereof.

    Regarding an NGDP futures market, could you please direct me to your most succinct explanation of this?

  46. Gravatar of Luis Enrique Luis Enrique
    21. August 2011 at 00:12

    The Guardian says nominal growth will help us escape our private debt problems, but corporations are net cash and nominal wage growth is lagging behind price growth, so if anything households are under pressure to borrow to maintain consumption. At least that’s what OBR forecasts said.

  47. Gravatar of Luis Enrique Luis Enrique
    21. August 2011 at 00:26

    Scott, have you written something like an FAQ about nominal GDP targeting? I realised just now I don’t understand how it avoids a stagflation outcome.

  48. Gravatar of Scott Sumner Scott Sumner
    21. August 2011 at 06:33

    Paul, Check out this post:

    https://www.themoneyillusion.com/?p=1184

    The point of using the other indicators was to estimate NGDP expectations. They should be used only to the extent that they are useful in doing so.

    Luis, NGDP targeting is not intended to avoid stagflation, because there is nothing any monetary policy can do about stagflation. The focus is entirely on NGDP. The link above explains the idea.

    Monetary stimulus would boost nominal (and real) incomes, and hence make it easier to repay nominal debts.

  49. Gravatar of Luis Enrique Luis Enrique
    21. August 2011 at 09:41

    Thanks Scott.

    So in the UK right now, we would be on target from a NGDP perspective, assuming a 5% growth target, which is the sort of target I get the impression you’d recommend. And if we are unsatisfied with too low real growth and too high unemployment, as we are, then we must reach for other policy measures.

    Also, nominal incomes are flat in the UK, right now, and real incomes are falling, which isn’t a very happy outcome. What policy might help there, I wonder, now monetary policy has done all it can getting NGDP on target.

    Would targeting higher NGDP growth help?

  50. Gravatar of Martin Martin
    21. August 2011 at 12:34

    “Martin, You are still misunderstanding my position. There is a big difference between using NGDP futures contracts to try to stabilize NGDP, and the alternative policy of letting NGDP fluctuate, then indexing wages, rents, etc., against changes in NGDP (or inflation.)”

    Scott,

    Re-reading what I posted, I see why you’d read it that way.

    “Most importantly, he desired official government publication of information on changes in the purchasing power of gold, combined with government assistance to facilitate fixed-units-of-purchasing-power contracts to safeguard the public against redistributive consequences of fluctuations in the price level, thereby removing a major source of business uncertainty (Marshall 1885: 77-81).”

    I read this as providing a hedge instrument (a contract) as a complement to existing contracts, whilst, I believe, you read it as providing assistance to index all contracts.

  51. Gravatar of ssumner ssumner
    21. August 2011 at 13:53

    Luis, I would need to know more. The UK may want to catch-up for the previous NGDP shortfall. In addition, how can nominal incomes be flat if NGDP is growing at 5%?

    Martin, OK, but even if it were a hedge, it’s asking a lot for every little business in America to start hedging their wage contracts. Better to provide a macro environment where those hedges aren’t needed. There are a lot of transactions costs with that many hedges.

  52. Gravatar of Martin Martin
    21. August 2011 at 14:55

    I agree, that’s why I consider your proposal to be more interesting. You’re in effect arguing that instead of setting the price of gold or the CPI, the central bank should set the price of those contracts. And as long that it is credible, contracts will move towards that price ‘by themselves’ (ratex equilibrium?). And because present NGDP is determined by the expected future path of NGDP, you’ve stabilized NGDP.

    On a side-note, and based on an earlier post, I do wonder though whether that graph displaying the distribution in wage changes would not change under such a regime. Something tells me that this is contingent on the expected growth rate of NGDP. If it isn’t then you might just as well through ratex out of the window, because then people are systematically over- or underestimating their MPL.

  53. Gravatar of Martin Martin
    21. August 2011 at 14:55

    through = throw

  54. Gravatar of Martin Martin
    21. August 2011 at 14:57

    And if the pattern does change, why not adopt a 0% NGDP growth rate, in effect, if I am not mistaken, a productivity norm?

  55. Gravatar of Paul Andrews Paul Andrews
    21. August 2011 at 20:16

    “Paul, Check out this post:

    https://www.themoneyillusion.com/?p=1184

    The point of using the other indicators was to estimate NGDP expectations. They should be used only to the extent that they are useful in doing so.”

    Thanks for the link on NGDP futures market.

    I think we would probably agree that the chances of success are less than 100%?

    If so, what would the objective criteria for failure be, and would the Fed need to renege on their market-maker status in order to stop the scheme?

  56. Gravatar of Scott Sumner Scott Sumner
    22. August 2011 at 15:34

    Martin, I don’t think it would change very much–the study was done in the late 1990s I believe, when NGDP growth expectations were roughly 5%. That’s why I am skeptical of a 0% norm, even 0% per capita. I think you’d still have money illusion.

    Paul, One could envision two types of failure. First, actual NGDP might become even more unstable, despite stable NGDP growth expectations. Or second, even with stable NGDP, the fluctuations in RGDP might get larger. In the second case it would be hard to know if NGDP targeting was to blame, but it would be perceived to be at fault.

    In the real world we would move very gradually to a NGDP futures targeting regime, not all at once.

  57. Gravatar of Paul Andrews Paul Andrews
    23. August 2011 at 00:44

    “Paul, One could envision two types of failure. First, actual NGDP might become even more unstable, despite stable NGDP growth expectations. Or second, even with stable NGDP, the fluctuations in RGDP might get larger. In the second case it would be hard to know if NGDP targeting was to blame, but it would be perceived to be at fault.”

    Similarly, if RGDP was stable and growing, it would be hard to know whether NGDP targeting was responsible.

    And if this is the case, then it is harder again to know in advance whether NGDP targeting would have that effect.

  58. Gravatar of Scott Sumner Scott Sumner
    23. August 2011 at 07:54

    Paul, If all we had were simple correlations, without evidence on causation, it would be hard to claim we know anything about macroeconomics. Fortunately, we do have strong evidence about correlation. Example: There was a big increase in the European money supply after 1492. There was also a big increase in the amount of gold and silver imported from the Americas. There was also a big increase in the price level in Europe in the 1500s. Do we know anything about causation? I’d say yes. I’d say it’s more likely that Columbus’s discovery led to the gold, which led to the money supply which led to the inflation. And it’s unlikely that Columbus looked in a crystal ball and saw the big inflation of the 1500s, then rushed out to discover America so that there would be enough gold to support that inflation.

    If we have evidence on exogenous monetary shocks, then we have evidence on causation, and we are able to make much more educated guesses as to why changes in monetary policy produeced certain effects. It’s not perfect, but we have good reasons for prefering one type of monetary policy over another.

  59. Gravatar of Paul Andrews Paul Andrews
    23. August 2011 at 15:39

    I agree it’s fairly certain that a big increase in the supply of gold in a gold-based monetary system causes inflation.

    I also agree it’s fairly certain that a big increase in printed currency in a non-credit fiat system causes inflation.

    I think it’s less certain, but possible, that a substitution of treasury bonds or other assets for reserves in a credit-fiat system is inflationary.

    I think it’s far from certain that induced inflation can cause stable and sustained RGDP growth.

  60. Gravatar of W. Peden W. Peden
    23. August 2011 at 16:50

    Paul Andrews,

    Inflation isn’t the cause of the growth- nominal demand is. Inflation is primarily a symptom of the recovery, not the cause; its positive effects are largely limited to resolving sticky wages problems and lowering real interest rates.

  61. Gravatar of Paul Andrews Paul Andrews
    23. August 2011 at 18:33

    W. Peden,

    Real demand is the cause of growth.

    Nominal demand is real demand adjusted for inflation.

    To target nominal growth without targeting real growth means to try to adjust inflation to cover any shortfall in real growth.

  62. Gravatar of Lorenzo from Oz Lorenzo from Oz
    24. August 2011 at 00:02

    Paul Andrews: this is why I have come to so dislike the construction “real”. People do not spend “real” wages or pay “real” prices, they spend wages and pay prices. Money is the fundamental signaling device in the economy, used because it so simplifies transactions. It is not pellucidly transparent to those statistical constructs “real” prices. Hence monetary changes can have (in the short term) output responses. (There are only two sorts of prices–money prices and barter prices: i.e. prices in terms of goods and services. So inflation measures the shift in the overall barter price of money. It is actively analytically misleading to postulate statistical constructs such as “real” prices as basic when no one uses them. )

    So, the question becomes–how much does production respond to any increase in spending? “Inflation” is the shortfall in output’s response to spending increases. (Which is why targeting inflation is a bad idea: it is the “noise” between spending and output–there would appear to be an optimal level of such “noise” but it is not as important as output nor as basic as spending.)

    So, saying To target nominal growth without targeting real growth means to try to adjust inflation to cover any shortfall in real growth is to miss the main game. You are trying to have spending adjusted to output shifts, which is a great way to create negative feedbacks (output falls, so you cut spending, so output falls more …). It is better to have stable spending so that (aggregate) output shifts can use (aggregate) price signals rather than targeting the signal, so undermining/misusing its information value.

  63. Gravatar of W. Peden W. Peden
    24. August 2011 at 03:37

    Paul Andrews,

    “Real demand is the cause of growth.”

    No. Real demand is used as a proxy for growth. It is no more the cause of growth than changes in the CPI are the cause of inflation.

    Whenever we talk about ‘real’ in economic statistics, we mean a fantasy world where prices didn’t adjust.

    “To target nominal growth without targeting real growth means to try to adjust inflation to cover any shortfall in real growth.”

    No, it just means to target the level of nominal growth. The breakup of nominal growth into real growth and inflation is outside of the Fed’s powers. More importantly, “real growth” is calculated by using GDP deflator statistics on nominal growth. Thinking of NGDP as real growth + inflation isn’t particularly helpful. A better way of looking at it is to think of real GDP as NGDP deflated using a price index.

  64. Gravatar of Paul Andrews Paul Andrews
    24. August 2011 at 05:31

    W. Peden,

    So you believe the following:

    Nominal demand is the cause of real growth.

    Real demand is not the cause of real growth.

    Is this correct?

  65. Gravatar of Paul Andrews Paul Andrews
    24. August 2011 at 05:34

    Lorenzo from Oz:

    “This is why I have come to so dislike the construction “real”.”

    So you believe the concept “real” is a construction?

  66. Gravatar of W. Peden W. Peden
    24. August 2011 at 05:50

    Paul Andrews,

    What is the difference between real demand and real growth?

  67. Gravatar of Paul Andrews Paul Andrews
    24. August 2011 at 06:04

    W. Peden: “What is the difference between real demand and real growth?”

    An increase in real demand is a symptom of, and a cause of, real growth. Would you agree with this?

    You seem to be saying the following: An increase in nominal demand causes real growth. (From your statement above: “Inflation isn’t the cause of the growth – nominal demand is”, in the context of RGDP). Is that a correct interpretation?

  68. Gravatar of W. Peden W. Peden
    24. August 2011 at 06:56

    “An increase in real demand is a symptom of, and a cause of, real growth. Would you agree with this?”

    Again, what’s the difference? Would you say that buying is a symptom of, and a cause of, selling?

    “You seem to be saying the following: An increase in nominal demand causes real growth. (From your statement above: “Inflation isn’t the cause of the growth – nominal demand is”, in the context of RGDP). Is that a correct interpretation?”

    I’ll put it this way: real growth figures are numbers produced by performing operations on nominal growth using price indexes, in order to measure changes in output. Nominal growth is the other side of the coin of nominal demand.

    Growth in output is caused by growth in demand i.e. when people buy things, that incentivises the provision of those things.

  69. Gravatar of Paul Andrews Paul Andrews
    24. August 2011 at 07:08

    W. Peden: “Again, what’s the difference? Would you say that buying is a symptom of, and a cause of, selling?”

    I’m not sure what you’re getting at here. They’re two sides of the same coin. Perhaps we are agreeing. Do you agree that “an increase in real demand is a symptom of, and a cause of, real growth” or not?

    “I’ll put it this way: real growth figures are numbers produced by performing operations on nominal growth using price indexes, in order to measure changes in output. Nominal growth is the other side of the coin of nominal demand.”

    I agree. So do you or don’t you think that increases in nominal demand cause real growth?

    “Growth in output is caused by growth in demand i.e. when people buy things, that incentivises the provision of those things.”

    I think you are meaning “real output” and “nominal demand” in the above – is that correct?

  70. Gravatar of W. Peden W. Peden
    24. August 2011 at 07:33

    “I’m not sure what you’re getting at here. They’re two sides of the same coin. Perhaps we are agreeing. Do you agree that “an increase in real demand is a symptom of, and a cause of, real growth” or not?”

    I’d say they’re one in the same thing. Producers in a market economy don’t produce if they don’t anticipate demand.

    “I agree. So do you or don’t you think that increases in nominal demand cause real growth?”

    If one wants to put it that way, sure. Nominal demand for their product is always the signal that makers producers produce, but nominal demand over and above the capacity of a producer to produce (within a given time period) is inflationary for that product.

    “I think you are meaning “real output” and “nominal demand” in the above – is that correct?”

    Yes.

  71. Gravatar of Paul Andrews Paul Andrews
    24. August 2011 at 14:58

    W. Peden,

    So to summarize, you think the following.

    Real demand is real growth.

    Nominal demand causes real growth.

    Therefore you think:

    Nominal demand causes real demand.

    Is that correct?

  72. Gravatar of W. Peden W. Peden
    25. August 2011 at 02:30

    Paul Andrews,

    That sounds about right, with obvious provisios about the limits of output i.e. a rise in nominal demand may just result in inflation, depending on the circumstances.

  73. Gravatar of Paul Andrews Paul Andrews
    25. August 2011 at 04:15

    W, Peden,

    OK, then as nominal demand is real demand plus inflation, you believe:

    (real demand + inflation) causes real demand.

    Is that correct?

  74. Gravatar of Scott Sumner Scott Sumner
    10. September 2011 at 07:40

    Paul, You said;

    “I think it’s far from certain that induced inflation can cause stable and sustained RGDP growth.”

    I agree, inflation targeting is a bad idea–as we are finding out.

    If we target NGDP we won’t get constant RGDP growth, but at least monetary policy won’t be adding further instability to an already unstable economy.

  75. Gravatar of Paul Andrews Paul Andrews
    14. November 2011 at 00:07

    Scott,

    I wasn’t referring to targeted inflation, just induced inflation. NGDP targeting involves inducing inflation to cover shortfalls in RGDP.

    In what way do you believe stability is affected by a long-term continual increase of private and public sector debt, as a ratio of NGDP? No effect at all? Increased stability for a long time followed by massive instability? Increased stability forever?

    In what way do you believe the ratio of private and public sector debt to NGDP is affected by induced inflation, whether targeted or not?

    In what way do you believe stability and efficient resource allocation is affected by an increase in the monetary base to compensate for collapsing private sector credit?

    In what way do you believe stability and efficient resource allocation is affected by the propping up of failed enterprises by the Fed, in the guise of increasing the monetary base?

    Are any of these factors in your models? If not, is it because you see them as having no bearing?

  76. Gravatar of Scott Sumner Scott Sumner
    14. November 2011 at 18:36

    Paul, You are attributing to me all sorts of beliefs I don’t hold. Maybe you should provide exact quotations, so you don’t misrepresent my views.

    NGDP targeting calls for deflation to offset fast real growth? Do you think that might reduce bubbles duriong boom periods?

  77. Gravatar of Paul Andrews Paul Andrews
    15. November 2011 at 01:11

    Scott,

    I don’t mean to attribute beliefs to you. I am asking you how you believe various factors impact on other factors. They aren’t meant to imply a belief on your part, they are genuinely questions only.

    Yes I think if NGDP were targeted at 5% during a period of 7% growth that would reduce the likelihood of bubbles, in the same way that 5% NGDP growth during a period of 3% growth increases the likelihood of bubbles.

  78. Gravatar of ssumner ssumner
    15. November 2011 at 13:06

    Paul, My claim is that bubbles depend more on NGDP than inflation. (By the way, I don’t think policymaker should directly focus on bubbles, as they aren’t good at predicting markets.)

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