In what sense is money too tight?
In the past few weeks I’ve done a few posts suggesting that monetary policy in the US is too tight.
A few years ago I did many posts suggesting that monetary policy is too tight.
I wouldn’t blame readers for assuming that I’m still making the same argument, but actually my current argument is quite different.
After late 2008, I thought money was too tight in an absolute sense, that is, according to any plausible Fed target. Unemployment was quite high and inflation expectations were very low.
Today is quite different. For instance, suppose the Fed announced tomorrow that they had adopted Bill Woolsey’s 3.0% NGDP target, level targeting. That’s certainly a very reasonable target. In that case I would not argue that money is currently too tight, I’d argue the Fed is right on course.
My current argument is that money is too tight in a relative sense, that is, relative to the Fed’s own announced 2% PCE inflation target. Now it’s true the Fed has a dual mandate, but nonetheless inflation should be expected to average 2% over the long term. And right now that’s not the case, PCE inflation is likely to undershoot 2% over the next few decades.
BTW, Here’s an article about the worsening nursing shortage. And here’s an article about the worsening teacher shortage. These are the middle class jobs that supposedly are no longer available, and yet employers can’t find people to do them at the current (sticky) wage rate. That suggests to me that we are getting close to the natural rate of unemployment. Maybe not quite there, but close.
PS. The first article also mentions that there is a shortage of schools to train nurses. Could this be a planned shortage, to keep salaries higher? (As with medical doctors)
Tags:
9. August 2015 at 18:35
Well, I have a friendly disagreement with part of this post.
A “reasonable” 3% NGDP LT strikes me as a monetary noose—not too far from lethal deflationary threats. Certainly with any recession, you would find yourself back in deflation. Capital spending might dry up with such a risk ever on the horizon.
What is wrong with old-fashioned boom times and 3% inflation? Say 6% to 7% NGDP growth?
9. August 2015 at 18:39
Ben, No, with a recession inflation would be higher than 3%.
9. August 2015 at 18:40
“At the same time, a growing number of English-language learners are entering public schools, yet it is increasingly difficult to find bilingual teachers. So schools are looking for applicants everywhere they can “” whether out of state or out of country “” and wooing candidates earlier and quicker.”
-I call B.S. on this hiring of bilingual teachers. I was an English-language learner as well, yet, I never had any bilingual teachers. So did all the other ELLs I knew.
“And right now that’s not the case, PCE inflation is likely to undershoot 2% over the next few decades.”
-Yup: http://againstjebelallawz.wordpress.com/2015/06/02/the-tightwad-fed/
9. August 2015 at 18:42
“Certainly with any recession, you would find yourself back in deflation. Capital spending might dry up with such a risk ever on the horizon.”
-How’d the US ever manage in the 1920s?
9. August 2015 at 19:03
Ben, in a break from his usual sycophancy, disagrees with Sumner who says: “No, with a recession inflation would be higher than 3%” (!?!)
What does Google say? ‘Does inflation rise or fall during a recession?’ gives a Yahoo answer sourced to the St. Louis Fed: “Best Answer: Inflation is defined as an increase of the general price level. During a recession, inflation will generally fall. In a recession, consumers spend less. As a result of the falling sales, the producers build up inventories which they need to clear at lower prices. This generates a downward pressure on the general price level and therefore lower inflation. This is called a disinflation during a recession.”
So who to believe? Scholars at the St. Louis Fed or…?
9. August 2015 at 19:12
Ray, as usual, does not look at the context of Sumner’s reply.
9. August 2015 at 19:32
I think Sumner means that if the fed could successfully target NGDP-growth then inflation would be higher during a recession when RGDP-growth likely slows.
9. August 2015 at 19:33
Exactly, other MF.
9. August 2015 at 19:49
Ray, I have never known someone to be as impossibly dumb as you. And I’ve read a lot of Major Freedom’s comments. Can you do even basic arithmetic? NGDP = RGDP + INFL? If NGDP is fixed, one component goes down, the other must…. hmmm… think about it… hmmm…. maybe ask one of the Phillipino girls? Im sure even they can do basic maths
9. August 2015 at 20:13
Does this explain why the Shanghai Composite is up 3.2% so far this morning?
“PBOC Vows More Flexible Yuan Movement and Greater Market Role”
http://www.bloomberg.com/news/articles/2015-08-07/pboc-vows-more-flexible-yuan-movement-and-greater-market-role
9. August 2015 at 20:45
Scott, I think there is still reason to describe it as tight in the absolute sense. At the least, monetary policy should create a context where markets can clear in a coherent way. Sticky wages is one case where monetary policy helps to avoid contexts where nominal prices don’t easily adjust. The zero bound on interest rates is another. We may be near the end of those problems. But, housing was a big part of this downturn, and clearly, beginning in 2007, home prices diverged from long term behavior relative to bond rates. Today, the real return on home ownership (net rent after depreciation and expenses / price) is higher than the nominal rate on long term treasuries. In other words, thinking of a home as a sort of TIPS bond, with rent inflation as the adjustment instead of CPI, homes are priced for 50 years of deflation. There is no possible way that this is a price reflecting a liquid market. But, macroprudential policies from various agencies mean that the conventional ways of funding homes are not available, and nobody is even trying to replace the old system. So, the very small part of the single family home market that is not owner-occupied is growing like gangbusters through all-cash purchases to fill the gap. And foreign money is coming in.
This is why employers are complaining of shortages while workers complain of stagnant wages. Wages are rising pretty strongly. I think we are near the top end of how strongly real wages will tend to rise, but most of it is going to rent inflation, because monetary and credit policy are still way too tight, in an absolute sense. This is clear from the DOA homebuilding sector and from the relationship of home prices to bond yields.
It’s kind of like Europe, and housing is Greece. Monetary policy is ok for 85% of the economy, but frictions that keep adjustments from moving housing into equilibrium mean that money is extremely tight in 15% of the economy.
9. August 2015 at 22:22
ssumner wrote: “That suggests to me that we are getting close to the natural rate of unemployment. Maybe not quite there, but close. That suggests to me that we are getting close to the natural rate of unemployment. Maybe not quite there, but close.”
Is this the same as full employment, i.e. the point at which, if you print money further, you only add to inflation and not to employment? Or has this theory been dismissed? Thanks
9. August 2015 at 23:18
Scott–yes, but…in the real world (I suspect) a NGDPLT of 3% would mean 1% inflation…so when a recession struck, even as monetary authorities reacted (timidly and begrudgingly), we would slip into deflation.
We have the institutional rigidities and biases of central bankers. They will always err on the low side and we would chronically slip into deflation.
I think my argument in some way is not “fair”. You are assuming a central bank that actually does very aggressively target 3% NGDPLT—meaning they might run high half the time. At 4% even.
Where do you find central bankers like that?
Please, in the real world let’s argue for a high bar…the risk is in undershooting, in terms of real growth…
10. August 2015 at 02:11
Maurizio,
Keynes defined full employment as the level at which an increase in investment results purely in an increase in prices. That’s not a theory, but a definition.
The NAIRU is the lowest rate of unemployment at which inflation does not have to be accelerating in order to maintain it.
The natural rate of unemployment was defined by Friedman as the “level of unemployment which has the property that it is consistent with equilibrium in the structure of real wages”, i.e. in which there is no money illusion.
Scott,
I’d be wary of drawing inferences about the natural rate from sectoral labour shortages. It’s like drawing inferences about NGDP growth from spending trends on CDs. A better indicator would be nominal wage growth, though I think that one of the most overlooked parts of Friedman’s work on the natural rate is that in a dynamic economy it is ex ante unknowable, which is why he thought it was unsuitable as a target of monetary policy.
10. August 2015 at 02:18
Maurizio,
Keynes defined full employment as the level at which an increase in investment results purely in an increase in prices. That’s not a theory, but a definition.
The NAIRU is the lowest rate of unemployment at which inflation does not have to be accelerating in order to maintain it.
The natural rate of unemployment was defined by Friedman as the “level of unemployment which has the property that it is consistent with equilibrium in the structure of real wages”, i.e. in which there is no money illusion.
Scott,
I’d be wary of drawing inferences about the natural rate from sectoral labour shortages. It’s like drawing inferences about NGDP growth from spending trends on CDs. A better indicator would be nominal wage growth, though I think that one of the most overlooked parts of Friedman’s work on the natural rate is that in a dynamic economy it is ex ante unknowable, which is why he thought it was unsuitable as a target of monetary policy.
Also, does the experience of the last few years suggest a problem for the hysteresis hypothesis for the US? After a very big unemployment shock, US unemployment has fallen down to about its crisis level without hitting up against the NAIRU. That suggests that whatever skills-erosion effects occurred were very insignificant. A natural rate explanation of the US pattern of recovery seems to work better: after a permanent AD shock, the unemployment rate slowly returned to its pre-crisis level and there was no equilibrium rise in the unemployment rate despite a sustained period of high unemployment.
It’s true that the employment rate is still low relative to the pre-crisis level, but we know that fluctuates for all sorts of reasons other than job availability.
10. August 2015 at 04:08
I think we are about 6 – 12 months full employment and the big question is whether we see labor participation start increasing with wage increases. (I suspect for the 16 – 24 year old we see an increase but not in older workers. Without the housing bubble again, I will see an increase of one income families which is not the worst thing either.)
In terms of teachers the big question is whether the Blue States start recruiting from Red States as I heard some of this in our Cali school district.
Anyway, we are seeing healthcare inflation creep up so I think that is a huge hint of reaching full employment. Considering everything else in the world, Matt Y. point that it might be wise to do an early rate rise to .5% just to get the overreaction shock over with.
10. August 2015 at 04:18
Thank you for pointing out that – given current market circumstance (“purposeful” limits in service formation) that further growth is “not needed” – supposedly of course. I have a recent post about this topic.
http://monetaryequivalence.blogspot.com/2015/08/notes-on-services-and-long-term-growth.html
10. August 2015 at 05:09
Scott Sumner:
Perhaps worth noting: the two professions you picked are perhaps indicating tight labor markets, teachers and nurses, are licensed professions in heavily regulated or public-sector industries.
Sheesh, anything could happen in markets like that.
The latest news was dead wages in Q2, the slowest increases since 1982, when records started being kept.
But like I always say, gee would it not be rotten, just rotten, if the U.S. had “labor shortages” for the next 10 years?
Boy, voters would absolutely turn against the free enterprise and demand more and more social welfare….
10. August 2015 at 05:11
“Scott-yes, but…in the real world (I suspect) a NGDPLT of 3% would mean 1% inflation…so when a recession struck, even as monetary authorities reacted (timidly and begrudgingly), we would slip into deflation.”
Not sure if you read and comprehended Scott’s response. If “a recession struck” with NGDPLT of 3 percent, inflation would exceed 3 percent, by definition. This strikes me as the same mistake Ray is making, even though he is getting all the grief.
But, if you are suggesting that maintaining an NGDPL Target is not feasible “in the real world”, then it also strikes me that a lot of folks are wasting their time here. And, I’m somewhat surprised at all the talk about “recession” under a market monetary NGDPLT regime. I’ve been long under the impression that the very purpose of market monetarism and NGDPLT is to prevent, or at least to significantly decrease the chances of, recession in the first place. This impression was formed, in part, because of the idea that monetary authorities would no longer simply be “reacting” ex post to events, much less “timidly and begrudgingly” reacting.
10. August 2015 at 06:11
“PCE inflation is likely to undershoot 2% over the next few decades.” – Was this intended to say the next few years?
10. August 2015 at 06:14
W. Peden,
The reason these kinds of services can affect the natural growth rate and nominal income, is the fact they are time based and reliant on other forms of wealth in order to occur. This, in spite of the fact that healthcare is a primary area of growth in the economy even as more direct forms of wealth creation continue to be held back.
10. August 2015 at 06:24
Kevin Erdmann,
Housing is still “waiting in line”…waiting for nominal income to be freed from the (current) restraints of service formation, which remain reliant on more direct wealth creation.
10. August 2015 at 06:28
I am not a fan of this post.
Muddled message.
10. August 2015 at 06:33
George Selgin has a new post praising Milton Friedman:
http://www.alt-m.org/2015/08/10/milton-friedman-monetary-freedom
10. August 2015 at 06:48
Ray, Of course inflation usually falls in recessions. That has no bearing on my claim. Ray, you are hitting new lows every day.
Ben, You said:
“Ray, I have never known someone to be as impossibly dumb as you.”
That’s why he’s so fun to mock—the perfect target for getting my frustrations out. Dumb and arrogant.
Kevin, If the target were 3% NGDPLT, then we would not be tight right now, we’d be right on target. I look at overall NGDP, not just housing.
Maurizio, No, you’d still get lower unemployment, but only in the short run.
Ben, Level targeting doesn’t allow them to cheat.
W. Peden, I agree that we can’t know where the natural rate of unemployment is. I’d say that in 2010 we were pretty certain we were well above it; now we simply don’t know.
Vivian, Ben’s saying they’d fall short of 3% NGDP growth.
rtd, No, I meant decades.
Travis, I prefer the term “nuanced”. 🙂
Seriously, I am claiming that money is too tight right now. Period, end of story. It’s just that the reasoning process is different.
10. August 2015 at 07:18
Scott, more evidence for your viewpoint:
http://www.reuters.com/article/2015/08/10/us-usa-fed-fischer-idUSKCN0QF17P20150810
I love the comment at the end, where Stanley Fischer is quoted as saying that low inflation “bothers” the Fed. So, they are bothered about missing their own targets again and again, but apparently not enough to do anything about it.
Why oh why can’t we have better monetary policy?
-Ken
Kenneth Duda
Menlo Park, CA
10. August 2015 at 07:51
Scott, my point is that policy posture is also related to creating functional markets. If you had a 3% ngdp target, and ngdp was growing at 3%, but every bond under 10 years had a yield of 0%, the your policy target would be too tight.
10. August 2015 at 08:26
‘The first article also mentions that there is a shortage of schools to train nurses. Could this be a planned shortage, to keep salaries higher? (As with medical doctors)’
The Obama CEA apparently thinks so;
https://www.whitehouse.gov/sites/default/files/docs/licensing_report_final_nonembargo.pdf
‘The evidence in this report suggests that licensing restricts mobility across States, increases the cost of goods and services to consumers, and reduces access to jobs in licensed occupations. The employment barriers created by licensing may raise wages for those who are successful in gaining entry to a licensed occupation, but they also raise prices for consumers and limit opportunity for other workers in terms of both wages and employment. By one estimate, licensing restrictions cost millions of jobs nationwide and raise consumer expenses by over one hundred billion dollars.’
Now, about that proposal of Obama for raising the minimum wage….
10. August 2015 at 08:41
I will disagree with this: “…Matt Y. point that it might be wise to do an early rate rise to .5% just to get the overreaction shock over with.”
In fact, I’d go in the other direction. I’d “raise” the Fed Funds rate target to 25 bps from the current 0-25bps and simultaneously end IOR (normalize IOR). Net-net, that’s a loosening.
The Fed won’t do that, so this isn’t a prediction. But it’s what I’d propose if I were at the Fed.
10. August 2015 at 08:47
I don’t think I believe in teacher “shortages” any more than you believe in bubbles. People not being willing to accept low wages and generally poor working conditions for a job that requires a high level of training does not constitute a shortage. We might as well complain about the shortage of $30,000 Ferraris.
10. August 2015 at 10:09
To my detractors, especially the other MF and Ben: I disagree that Sumner made the points you make, but even if he does (as suggested by Ben), it is speculative that we’ll get the outcome that Ben suggests. Examine the passage from the comments:
//
Ben: What is wrong with old-fashioned boom times and 3% inflation? Say 6% to 7% NGDP growth?
Scott: Ben, No, with a recession inflation would be higher than 3%.
//
Do the math: assume NGDP = inflation + RGDP. Let’s pick Ben’s 6%/yr NGDP as the figure to use.
During ‘boom times’ it’s 6% NGDP = 3% inflation + 3% RGDP
During ‘recession’ Sumner asserts “inflation would be higher than 3%” (!). So let’s say a recession is defined as zero NGDP. Hence 0 = inflation + RGDP, Inflation > 3%, so Real GDP = 9%/yr inflation.
Hence, Sumner (says Ben) is saying that targeting NGDP will give the same 6%/yr NGDP growth, but inflation would vary from 3%/yr during ‘boom times’ and greater than 9%/yr during recession. Inflation would rise during a recession when targeting NGDP.
The trouble with this line of thought is at least two-fold. First, if money is neutral (and by all accounts it is, even and especially Ben S. Bernanke’s 2003 paper implies it basically is, having with 95% confidence only 3.2% out of 100% effect), then you cannot uncouple real and nominal GDP in such a fashion as suggested by Ben’s interpretation. Second, there’s no model aside from Sumner’s “because I say so” that can prove the equations suggested by Ben’s interpretation exist.
In short, I was right in my initial comment. Only later via Ben’s commentary did Sumner’s circle get squared, but it’s still flawed.
PS–Vivian Darkbloom is right on the money. Ben makes the same ‘mistake’ I did, but in his mistake he is of course correct.
10. August 2015 at 10:09
On nursing schools: I heard a report years ago that nursing schools have difficulty recruiting teachers because the pay in the field is so good. Anyways it would be nice if they had more computers and robots to do nurses jobs so that healthcare costs would be lower but I don’t see it happening anytime soon.
10. August 2015 at 10:15
The teacher situation has some unique aspects — some states are doing away with defined-benefit altogether or scaling it way back for new hires because the pensions are driving them into bankruptcy. This does very little for near-term budgets but the teacher’s unions strongly favors existing members over newcomers, who now face significantly reduced prospects for long-term compensation.
Worse, the teaching racket is a bit of a self-licking ice cream cone: to be an educator naturally requires lots of education. Few people want to go to school for seven years for jobs where the compensation is now so poor, especially since the entry-level pay is relatively even worse because the compensation is now even more strongly tied to seniority.
And this problem is even worse in places like San Francisco, because it costs so much to live there.
The whole education model is pretty ridiculous. You really don’t need a Master’s degree from Stanford to teach 4th graders fractions.
10. August 2015 at 10:16
Scott — If NGDPg were pegged at 4% per annum, would you argue that once we dropped to the natural rate of unemployment, the UR would level off b/c nominal wages would start to rise at about the rate of NGDPg?
P.S. — The Atlanta Fed model is tracking 1% RGDP for Q3. Let’s just hope it goes up from here like the Q2 estimate did (it started off at 0.7 and rose to 2.4).
https://www.frbatlanta.org/cqer/research/gdpnow.aspx
10. August 2015 at 10:18
@myself – in my last comment, WordPress dropped huge amounts of text since I used inequality symbols, which in crude, anti-SQL attack servers (of the primitive kind), these symbols are stripped out of any text. Very primitive, but that’s WordPress.
Anyway, what I am trying to say is: given NGDP = inflation + RGDP.
boom times 6 = 3 + 3
bust times 6 = 9 – 3
So Sumner’s bust times calculation as suggested by Ben works only if you assume nominal and real GDPs can be decoupled in such a manner, which is unproven.
10. August 2015 at 10:58
Ken, They are too attached to this view that growth causes inflation. In fact, only demand side growth causes inflation, and with NGDP growing at under 4%, I just don’t see it.
Kevin, OK, that’s a really good argument. I think we are still trying to understand what zero interest rates imply, but you are probably right that NGDP growth should be high enough to keep us above the zero bound.
Bill, That might work, but the actual ffr would fall below 0.25%, without IOR.
TallDave, You said:
“Worse, the teaching racket is a bit of a self-licking ice cream cone: to be an educator naturally requires lots of education.”
Why? Isn’t 4 years enough?
Tommy, Yes, that’s right.
10. August 2015 at 10:59
Bill, Yes, but a few years ago there was a surplus of teachers at that same lousy wage.
10. August 2015 at 11:15
“During ‘recession’ Sumner asserts “inflation would be higher than 3%” (!). So let’s say a recession is defined as zero NGDP. Hence 0 = inflation + RGDP, Inflation > 3%, so Real GDP = 9%/yr inflation.”
Ray, I’m not sure what that’s supposed to mean. You’ve got me stumped, and it wouldn’t be the first time. Unfortunately, there is no fixed definition of “recession”. However, to the extent that GDP is the, or even a relevant factor in assessing whether there is one, I believe it is generally accepted that the relevant measure is in real, not nominal terms. Hence the idea that if there is a target of 3 percent NGDP, and that target is met, during a recession (in which real GDP declines) inflation is higher than 3 percent, by definition.
10. August 2015 at 11:30
Scott,
In California, I have 3 kids in a mid-level/high achieving district, we are hearing about the teacher although it mostly coming out in substitute teachers or other supporting staff. Also we are poaching other states with the promise that us Californian like blowing our tax dollars on teachers instead of NFL teams.
I do wonder if some of the teacher and nurse ‘shortage’ also coming from the decrease in the labor force participation as more families are moving towards a single income providers. (One spouce worked for higher wages in the private sector while the other spouce worked as a teacher for the second income to pay for a higher house price, which is a lot lower today. Also in California there is a lot more home schooling as well.)
10. August 2015 at 11:47
It seems ridiculously difficult to get into the RN program in the state schools of Florida in recent years. Students with very high 1st year cums cannot get into the nursing programs. What is up with that?
10. August 2015 at 12:00
“During ‘recession’ Sumner asserts “inflation would be higher than 3%” (!). So let’s say a recession is defined as zero NGDP. Hence 0 = inflation + RGDP, Inflation > 3%, so Real GDP = 9%/yr inflation.”
Pre Ray “the cruisader” Lopez, I thought this blog was an awesome source of interesting thoughts
But Ray manages to bring the discussion to a whole new level. Very impressive. I think it is time for professor Sumner to make a “in praise of Ray Lopez” post. We’ll know we have a good monetary system when someone like Ray can be put head of the Fed without us having to worry about where AD is going to be in the next 10 years
10. August 2015 at 12:11
In picking an NGDP target of 5% vs. 3% what are the considerations in selecting the optimum target? I understand the idea that in the big picture it’s more important to hit a target than exactly what it is.
However, are there any long run advantages to one target as opposed to another?
10. August 2015 at 12:45
I was expecting a post along these lines, and expect to see more. If inflation target is 1,5% and potential GDP is really, let’s say, 2%, I want to see market monetarits claim NGDP of 4.5% means too loose monetary policy stance. And ask for interest rate hikes.
10. August 2015 at 13:33
Why would you want to risk the health of the economy on the line for a 3% NGDP target? Suppose it doesn’t work as well as you think? Then you run into trouble in the next recession when you can’t generate enough counter-cyclic inflation. Why not just target 5% or maybe even 6-7% and then you know if you’re policy doesn’t work perfectly in the next recession things will most likely still be fine? I don’t understand the mania for getting inflation as low as possible, right down to the point where monetary management gets really hard at exactly the worst possible time. All downside and little upside.
10. August 2015 at 13:33
Mike Sax,
Some arguments for a higher NGDP target are (a) downward wage rigidity, i.e. the idea that workers are reluctant to accept nominal wage cuts, and (b) a smaller central bank balance sheet due to a higher opportunity cost of holding base money.
Some arguments for a lower NGDP target are (a) reducing the deadweight loss caused by the different rates of return on cash and very short-term bonds, and (b) menu-costs.
George Selgin is the most notable advocate for a very low NGDP target and Scott Sumner’s 5% is just about the highest rate I’ve seen a pro-NGDP target economist propose. In both cases, their position would depend on particular anticipated features of the economy in question, rather than a cast-iron law.
10. August 2015 at 14:47
@Jose Romeu Robazzi: “If inflation target is 1,5% and potential GDP is really, let’s say, 2%, I want to see market monetarits claim NGDP of 4.5% means too loose monetary policy stance.”
That’s an odd request, since Market Monetarists don’t want an “inflation target” (they want an NGDP target), and they deal with real GDP, not “potential” GDP.
You’ve set up a situation where the monetary policy regime follows none of the advice of MM, and then you want the MMs to comment on whether the resulting NGDP is too loose or not?
10. August 2015 at 14:55
@Ray Lopez: “So let’s say a recession is defined as zero NGDP.”
Good one! Also, black is white, and up is down. If you don’t know what you’re talking about, might as well randomly redefine common words.
“First, if money is neutral … then you cannot uncouple real and nominal GDP”
How do you manage to be so consistently wrong, that the opposite of what you claim is a much better guide to real-world truth, than the actual words that you write?
Hint: if money really were neutral, then there would be no connection between real, and nominal, GDP. They would always be “uncoupled”. That’s what “neutral” means.
How can you write dozens of comments, constantly repeating your silly claim that money is neutral … without even understanding what it is that you yourself are claiming? It boggles the mind!
10. August 2015 at 15:20
Okay I will put it this way: A 3% NGDP target will result in real growth about 1.8% and 1.2% inflation.
A 6% NGDP target will result in a 3 + 3 split, about.
That’s my story and I’m sticking with it.
Print more money.
10. August 2015 at 15:56
Ok Ben Cole I’m going to take a stab and unpack it. I think the idea is that it depends on trend RGDP.
If for instance trend RGDP is 3% then a 3% NGDP target would mean 3% RGDP and and 0% inflation.
A 6% NGDP target would mean 3% RGDP and 3% inflation.
10. August 2015 at 15:57
I hope I’m not being too manic about housing, but my point is that today’s monetary policy (including various “macroprudential” postures) has housing at the equivalent of the zero lower bound problem. Home values needed to rise at least another 20-30% to get to the range of a functional market. This could be enabled through either currency or credit expansion, but neither is operative now.
If we are going to continue with a regime where less than half of the country is able to access real estate credit, then equity ownership will presumably increase. I wonder if a much larger currency holding will be permanent in this regime.
Homeownership was about 45% until the New Deal, after which it rose to about 64% by 1970 and remained pretty steady after that. (Unfortunately, the measure at Fred only goes back to the 1960s). When ownership was lower, the banks held much larger holdings of treasuries and securities, and currency holdings were higher. My knowledge of banking history isn’t strong enough to know what other influences there were on that, but it makes sense to me that there would be the relationship between currency, securities at the banks, and real estate loans.
Excess reserves at the banks aren’t that much different than holding treasuries. If we count reserves as securities, and if mortgages will remain inaccessible, then is there really that much of QE that needs to be unwound? Could it be that we need a lot of currency to be released in order to fund equity purchases of real estate?
https://research.stlouisfed.org/fred2/graph/?g=1ByR
10. August 2015 at 15:58
Again that would be on a trend basis. During the boom you would expect higher GDP and so lower inflation and during the recession you would have lower GDP and higher inflation.
10. August 2015 at 19:20
@Don, ok, wrong term, but the idea is simple: let’s assume average expected inflation is 1,5%, and potential RGDP is 2%. Then, 5% NGDP growth will demand tightening stance
@Ben Cole: I thought money was neutral in the long run. Therefore, higher NGDP just leads us to higher inflation, not higher RGDP. Maybe money is not superneutral, so, going from NGDP 5% to 3% is bad. But once you are there for a certain time, at 3.5% NGDP, it does not matter anymore, since money is neutral in the long run.
10. August 2015 at 19:36
@mpowell
What is so hard about managing monetary policy? Just do QE, and target your NGDP forecast (provided by NGDP futures). Not hard at all. And why don’t I like inflation? Because we are not very good estimating it. In fact, people in this blog use to say: “all there is is NGDP”. I agree. All models we have to estimate (not measure it, because we can’t really measure it) inflation are flawed. If we can’t estimate it properly, just let’s use a framework whare it does not do harm. And to me, that is NGDP target = potential RGDP.
10. August 2015 at 22:50
Scott — If we require educators to be educated for more than four years, the demand for teaching from teachers will increase. The ice cream cone must be taught to lick itself!
11. August 2015 at 01:37
Kevin E’s insights point to a political economy fit for continued US preeminence. higher rates of employment and home ownership r the perfect bribe for open borders
11. August 2015 at 04:12
So did I get my comment to Ben right or not? I’m trying to see if I get it.
11. August 2015 at 06:09
Collin, Are more families really moving to a single worker? Why would that be happening?
Mike, See W. Peden. Also the cost of excessive taxation of capital rises as NGDP growth rises.
Jose, MMs are not doves, at least I’m not. I was hawkish almost constantly from when I was young, up to 1982.
mpowell, I’m not advocating a 3% target. I’m just saying it would be reasonable if adopted. You might well be right that 5% is better. I’m agnostic. The real problem is not the trend rate, it’s the instability.
Kevin, OK, but my point is that any problems in real estate aren’t going to be significantly different with a 3% trend rate or a 5% trend rate. It may be that more monetary stimulus is needed right now, but that’s a different argument.
11. August 2015 at 06:40
“A gauge of compensation costs, unit labor costs, increased at a 0.5% annual rate from April through June.”–today’s WSJ.
Dudes, any growth in the present economy results in output increases, meaning productivity increases (even if just less overhead per unit), meaning just about zero increases in unit labor costs.
So, commodities are dead, unit labor costs are dead. Economic growth is poor.
Does it get any more obvious than this? The Fed should be blowing Benjamin Franklins out the front door with firehoses.
Even that will likely only result in an economic boom, not much inflation.
Why? Because the U.S. imports goods and services, and we have capital gluts globally. Any bottlenecks attract capital in tidal waves—see energy. See copper. See even corn (re stupid ethanol).
(This is where Hume is wrong: More money demand creates much more supply).
The only exception is Erdmann’s housing markets. Yes, you cannot build 40-story condos in nice neighborhoods (except in Manhattan and downtown L.A.), ergo we will have housing shortages.
This is not the time to worry about inflation, or act like little mice-men by the Fed printing presses. This is time to really let it rip.
Where is Arthur Burns when we need him?
11. August 2015 at 06:44
But regarding a target of 6% vs. 3% is it true to say that assuming RGDP is 3% then in the first case you would have 3% inflation and in the second 0%
11. August 2015 at 06:46
Don’t get me wrong, Ben Cole, I’m not disagreeing with you. I’d be all for 6%, I’m just trying to game it out.
11. August 2015 at 09:01
I’d be surprised to learn that New York state has a teacher shortage, even with the very strict credentialing the state imposes. Public school teachers must have a Masters degree in education (one of the main reasons public schools here are as bad as they are).
From February of this year:
“Of the 15,102 candidates who were certified in 2011-12, only 4,289 were employed in the state’s public schools, including charters, as of October 2013.”
Tough job market for NY teacher candidates
That’s two years ago, but still….
11. August 2015 at 09:03
Oh heck – sorry.
Wrong link.
Tough job market for NY teacher candidates | February 1, 2015
12. August 2015 at 11:41
@Don Geddis – “Hint: if money really were neutral, then there would be no connection between real, and nominal, GDP. ” – we’ve been on this topic before. As I told you then, and I repeat now, you can have a connection between real and nominal GDP even if money is neutral: it’s simply, ex post, the inflation rate (NGDP = RGDP + inflation). It’s just that ex-ante you can’t figure out RGDP from NGDP and inflation, since there’s little or no correlation between printing money and what the real (or even nominal) economy does, short term. This is because, inter alia, money is neutral, prices are not sticky, nor are wages much either.
12. August 2015 at 15:44
@Ray Lopez: We may have been over this before, but apparently you still haven’t learned anything. You can’t use the algebra of “NGDP = RGDP + inflation” to determine anything about the correlation between NGDP and RGDP, because inflation can vary. If you print money and NGDP goes up, your little algebra equation doesn’t tell you whether that shows up as only RGDP, only inflation, or some combination. (And if RGDP goes up for supply-side reasons, inflation might drop by exactly the same amount, leaving NGDP unchanged.)
You can’t even be consistent within one tiny comment. Look at your own words: “you can have a connection between real and nominal GDP even if money is neutral” but then also “there’s little or no correlation between printing money and what the real (or even nominal) economy does … because … money is neutral“. So first you tell me that there can be a connection, even if money is neutral, and then later you say that there is no connection, because money is neutral.
You can’t even make up coherent sentences, even if you use your own (silly) private definitions of all the technical terms. There’s no point in trying to respond to the content of your comments, because they’re self-contradictory.