It’s not about inflation
Over the years my critics, and even some of my supporters, have said; “Sumner is basically proposing higher inflation as a solution.” That was never really true, I was proposing 5% NGDP, level targeting. And even though inflation would have been above 2% in the 2008-11 period, a stable NGDP policy would have prevented that inflation from having the sort of negative effects that economists see as resulting from high inflation. My plan would not have hurt savers, in aggregate.
Even so, there was a grain of truth in the claim. The inflation rate would have run above 2% for a number of years under my proposal. But now even that is no longer true. There have been enough wage/price adjustments to the lower NGDP growth rate that the SRAS has been shifting to the right. This means that today even a 2% inflation rate would produce a robust recovery. But we aren’t even getting that inflation rate, indeed Bloomberg reports that the rate has fallen to 1%:
Bond investors are signaling they expect the Federal Reserve to lose its battle against disinflation, even after inundating the U.S. economy with more than $3 trillion in the past five years.
While central banks around the world are trying to spur demand and boost prices, signs are emerging that a slowdown in inflation is becoming entrenched. Treasury Inflation-Protected Securities are suffering unprecedented losses after inflation in the U.S. rose 1 percent last month, the smallest increase since 2009. Known as TIPS, the bonds have plunged 8.8 percent this year, the most since they were introduced in 1997, according to Bank of America Merrill Lynch indexes.
“The idea that central banks can always get the inflation rate they want is something that’s going to pass away,” Peter Fisher, the former Fed official and undersecretary for domestic finance at the U.S. Treasury, who now serves as senior managing director at BlackRock Inc., said in an interview on Dec. 9. “We could be at a 1 percent inflation rate for a long time.”
In a recent post Andy Harless suggested that it was obvious that nominal interest rates were lower than expected NGDP growth. I’m not sure why he makes that claim. NGDP has been growing at 4% during a period when the unemployment rate is falling at 0.7% per year. Once unemployment stops falling (around 2016) the growth rate of NGDP will likely slow even further, to below 3.5%. And 30 year bonds are currently yielding about 3.85%. Yes, the inflation rate may rise a bit at that point, but it’s not at all clear to me that 30 year bond yields exceed 30 year NGDP growth expectations. The markets seem to have read The Great Stagnation.
PS. That doesn’t mean Andy is wrong. It’s quite possible that countries would benefit from issuing more safe assets and using the funds to buy global stock index funds. Or subsidizing low wage jobs. I’m agnostic on that question.
HT: James
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16. December 2013 at 18:42
Central bankss cannot obtain inflation above 1 percent?
Oh yeah? Put me in the Fed chair for a couple weeks…
16. December 2013 at 19:21
Scott,
I know sometimes I’m a wiseguy, but here I’m really just trying to understand your position. You wrote:
It’s quite possible that countries would benefit from issuing more safe assets and using the funds to buy global stock index funds. Or subsidizing low wage jobs. I’m agnostic on that question.
What do you mean? You’re saying that it might be a good idea for the government to run up a bigger fiscal deficit, in order to give subsidies to low-wage workers and/or start a hedge fund?
If that *is* what you’re saying, my question is: Compared to what? Are you adopting a Krugmanian position, and saying, “OK, supposing the central bank isn’t going to target NGDPLT, I’m fine with it using deficits, and I’m not too concerned about what they spend the money on”?
Again, I realize I’m sounding sarcastic here, but I don’t mean to be. I’m genuinely trying to understand the parts I quoted from you above.
17. December 2013 at 02:27
Yes, it’s all about nominal income. You have completely sold me that inflation is the wrong language.
17. December 2013 at 03:52
Simple, clear. Of course, I always thought this part was. This should be helpful to minimize some unwarranted criticisms.
Is it the case that inflation targeting shares some similar underlying sentiment as NGDPLT, just a watered down, less meaningful version of it?
17. December 2013 at 04:02
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17. December 2013 at 04:14
The quote from the Blackrock guy is maddening. In the next breath he’ll say monetary policy is ‘super accommodative’. Well, which is it?
If central banks choose to fail, they won’t get the inflation rate they want. If they choose to succeed – and target the forecast, they will.
How was it the Fed produced positive ~3% average inflation between 1934-36 with a 30-50% output gap? Devaluation and a permanent rise in the expected future base relative to expected future base demand.
Wall Street commentators don’t get it but markets do. Effen clownshow.
17. December 2013 at 05:26
Robert:
You need to read the Harless post.
Sumner thinks monetary policy would aim to keep nominal GDP on a 5% growth path. He thinks it can do that.
Now, as an entirely separate matter, do low interest rates on short term government bonds mean that the government should issue more?
If they were to issue more, presumably something would be funded. Sumner suggested two things.
But this has nothing to do with monetary policy or the best nominal anchor for the economy.
17. December 2013 at 05:33
Ben, Me too.
Bob, No, I do not want the central bank doing that sort of thing. My point is that if Andy Harless is right about the shortage of safe assets, a country might benefit from issuing more safe assets. That raises the question of what to do with the money. Those two examples are less wasteful than something like high speed rail.
17. December 2013 at 06:14
Scott,
Your passion for the defense of your preferred monetary policy is only matched by your reluctance to discuss its implementation.
Consider this paradox. In the pursuit of raising nominal income the central bank may purchase treasuries. Doing this will lower yields for those securities. Does it not follow that the nominal income for holders of these securities is decreased? And when you consider the tens of millions who either directly or indirectly hold debt securities this loss of income is substantial. And policymakers wonder why the consumer is reluctant to display his “animal spirits”?
There is no free lunch and someone must pay the piper. Lenders and borrowers might be saved from the consequences of bad debts but it will only happen at a cost to someone else.
17. December 2013 at 06:48
Dustin wrote:
“Is it the case that inflation targeting shares some similar underlying sentiment as NGDPLT, just a watered down, less meaningful version of it?”
Read Scott’s article “Re-Targeting the Fed” in National Affairs – in it, he compares NGDP and inflation targets.
http://www.nationalaffairs.com/publications/detail/re-targeting-the-fed
17. December 2013 at 08:31
Scott, if you’ll permit me one more then: Do you think a country could still suffer from a shortage of safe assets, even if the central bank followed your exact advice?
17. December 2013 at 11:27
Double good news from Sweden. A rate cut and quality reporting in it from Bloomberg, showing the Svensson critique has won over the markets in Sweden and is forcing action from the Central Bank, not enough, sure, but the right direction.
http://www.bloomberg.com/news/2013-12-17/riksbank-cuts-benchmark-rate-as-disinflation-hurts-credibility.html
And the average Bloomberg reporter’s kneejerk response to more low CPI numbers in the US today is to complain the Fed is taking it’s time to get inflation back up, yes up, to target.
http://www.bloomberg.com/news/2013-12-17/consumer-prices-in-u-s-unchanged-in-november-on-cheaper-energy.html
17. December 2013 at 13:58
Dan W. You said;
“Consider this paradox. In the pursuit of raising nominal income the central bank may purchase treasuries. Doing this will lower yields for those securities.”
You must be young. No one who lived through the 1970s would ever say something like that. T-bonds yielded 15% by 1981. How’d that happen? The answer is simple, the Fed bought lots of T-bonds.
You said;
There is no free lunch and someone must pay the piper. Lenders and borrowers might be saved from the consequences of bad debts but it will only happen at a cost to someone else.”
It’s fine if you disagree with me, but first you need to understand what I am proposing. I’ve never proposed using monetary policy to bail out borrowers. You might want to read my Mercatus paper on The Case for NGDP Targeting.
Bob, Possibly. One solution is a higher NGDP growth target. This post listed a couple other possible solutions. Overall I’d probably favor a higher NGDP growth target. High enough to get interest rates above zero.
Thanks James, I did a post.
17. December 2013 at 14:17
Your link to my blog post seems to be wrong. The “http” part at the beginning is repeated twice.
I find it pretty implausible that the market’s estimate of 30-year NGDP growth is below 4%. It’s quite plausible that it will turn out to be lower ex post. And it’s quite plausible that there is a sizable minority of market participants (of which Tyler Cowen might be one) who expect it to be lower. But not that the typical person making a decision to buy or sell T-bonds expects it to be lower. (Of course, yes, it would be nice to have NGDP futures, so we wouldn’t have to argue about this.) The latest FOMC projections (pdf) have a 2.1% to 2.5% longer run real growth rate and (of course) a 2% longer run inflation rate, so that would imply 4.1% to 4.5% NGDP growth, which is consistent with my impression of what the market expects.
“Once unemployment stops falling (around 2016) the growth rate of NGDP will likely slow even further, to below 3.5%”
I don’t know why one would expect it to slow. First of all, as you note, the inflation rate may rise, and indeed, if it doesn’t rise, the Fed is kind of screwed, because they have an official 2% target now. Hard to believe they would continue missing the target on low side for decades on end. Second, the fall in the unemployment rate partly reflects labor force exit due to a weak economy. As the economy recovers, we should see this process reverse. The Fed is projecting faster real GDP growth in 2015 and 2016, even as it projects the unemployment rate to stabilize.
In any case, historically, T-bond yields have typically been lower than the growth rate.
Also, I think what is relevant for my argument are after-tax yields, which will be even lower for the marginal buyer.
17. December 2013 at 17:13
[…] You can see me discussing it with him in the comments, but I am somewhat alarmed at how casually Scott Sumner is OK with the governments of the world […]
17. December 2013 at 19:05
Michael,
Yep I’ve read that one, and will do so again to refresh. I don’t recall it addressing the sentiment of the targetting regime, but rather the purposes / effects / limitations.
I guess I just don’t understand how some may support inflation targetting but not NGDPLT, which is conceptually a variable inflation targetting as I understand it. NGDPLT seems like an obvious, more dynamic, and more meaningful extension of inflation targetting.
18. December 2013 at 06:04
Andy, I am forecasting low trend RGDP growth, perhaps around 1.5%. I hope I’m wrong.
Your after tax point is a good one. If that’s the proper measure then you are clearly right.