Matt Yglesias on America’s self-induced paralysis

This is from an excellent Matt Yglesias post entitled “Could A Determined Central Bank Fail To Inflate?”:

He quotes both former Federal Reserve Vice Chair Donald Kohn and former NEC Chairman Larry Summers as expressing skepticism that it would be possible for the Federal Reserve to generate higher inflation expectations under conditions of depressed demand and slack output. It’s difficult for me to know how we would prove this one way or another, but I believe this view is mistaken. What’s more, I think it’s noteworthy that administration officials who say they believe this seem disinclined to follow this line of thought to its logical conclusion.

For starters, a little throat-clearing about the burden of proof. Many of the inflation skeptics have impressive resumes. What they don’t seem to have are empirical examples of central banks determined to raise inflation expectations and failing to do so. We don’t, unfortunately, have a directly parallel case to the current U.S. situation. But on my side I’ll cite as evidence the successful implementations of exchange rate policy by Sweden, Israel, and Switzerland during the current recession. Those, however, are small economy. So I’ll also cite FDR’s gold policy in the 1930s. That, however, was a gold standard. Then there’s QE 2. I would say we have examples of small open economies with determined policymakers doing this successfully. I would say we have an example of a large economy with determined policymakers doing this successfully under different historical conditions. And I would say we have an example of the Federal Reserving acting with only weak determination and achieving weak results. In my view that means our overwhelming presumption ought to be that a determined Federal Reserve system could increase nominal expectations, especially if the president and the treasury secretary supported that goal.

What’s more, it’s important to get a better understanding of why this would help the economy. The Obama administration seems to have thought of higher inflation expectations as useful primarily because they would help with the debt-deleveraging problem. That’s true. But there’s something more profound happening. Higher expected inflation lowers real interest rates and encourages investment. Higher expected inflation, at the margin, spurs consumption among households who aren’t debt-constrained. Most of all, higher expected inflation coordinates expectations so that households and firms expect higher levels of nominal spending and nominal income in the future, which encourages more real economic activity.

Now flip this around. What if I’m wrong. What if Michael Woodford and Paul Krugman and Lars Svensson and Scott Sumner are wrong? What if the academic writing of Christina Romer and Ben Bernanke is wrong? What if there’s something different about the 1930s and Switzerland and Sweden and Israel that means that in the United States you can’t spur higher inflation expectations as long as there’s all this slack in the economy? Well that’d be a pretty wild scenario. I first started to hear about this scenario back in late 2008 from folks who regarded themselves as well outside the mainstream of the economics profession. Their wacky idea was that faced with a deep recession, the government should basically just finance itself by printing money and not bother with the whole taxes thing. The natural counter to that argument was and is that such a policy would be highly inflationary. Personally, I’m old-fashioned, and I think it would be inflationary for the central bank to just print money at random to finance government operations. But by the same token, I have no doubt that a determined central bank can create inflation expectations. So bringing this back around to where we began, I think the Obama team made a huge mistake here and that most of the key players continue to be making the same mistake. Worse, a large fraction of the progressive community keeps making it along with them. But either the Fed could be doing a lot more to fix the economy, or else some really strange fiscal policy ideas need to be adopted.

It’s interesting to compare Matt’s post to the Ryan Avent quotation discussed in the previous post.  It seems to me that there is growing acceptance of this view among thoughtful centrists and progressives.  As much as I’d like to give credit to us market monetarists, there was obviously a sort of historical inevitability to the increased focus on the Fed, especially after fiscal policy seemed to reach a cul de sac.  Still, I think it’s fair to say we’ve at least contributed some talking points, which allow others to make the case much more effectively than we can.

PS.  I don’t mean to suggest that Avent and Yglesias are recent converts to these views–they been discussing monetary stimulus for several years.  Rather that the issue recently seems to have taken on a new urgency, especially given the lackluster employment numbers.

PPS.  This is also an excellent post.



47 Responses to “Matt Yglesias on America’s self-induced paralysis”

  1. Gravatar of Yaguar Yaguar
    11. October 2011 at 09:18

    It’s absurd that such a question even exists: “Could A Determined Central Bank Fail To Inflate?”

    I propose that the Fed do the following operations – all of them financed by the creation of dollars.

    1. Purchase the entire US public debt. I mean literally, all of it. Hell, let’s purchase the entire US bond market. Corporate, municipal, everything. ($35,000,000,000,000)
    2. Exchange dollars for other currencies. Purchase the entire supply of Purchase the rest of the worldwide bond market. ($55,000,000,000,000)
    3. Request permission to fund the US Government indefinitely using printed dollars.

    At what point do my dollars start losing purchasing power?

  2. Gravatar of JimP JimP
    11. October 2011 at 09:27

  3. Gravatar of MikeDC MikeDC
    11. October 2011 at 09:44

    Rather that the issue recently seems to have taken on a new urgency, especially given the lackluster prospects for a continued Democratic presidency.

  4. Gravatar of Benjamin Cole Benjamin Cole
    11. October 2011 at 09:51

    Sure, in a nation of 300 million, others besides Scott Sumner might have started or embraced what is now called Market Monetarism.

    But I think Sumner led the charge, and fought a lonely uphill battle for many a moon, armed only with his blog, the wonderful Internet, and his intellect. If they made movies about economists sitting down by their online computer terminals…btw, I get movie rights!!!! And book rights before that, as this is one helluva story.

    The Market Monetarism Market is now airborne. From here, the need is to properly frame arguments to appeal to policymakers and the public. We will never convince the Austrians, or GOP sappers who want Obama to fail. (The GOP will embrace us as soon as Romney wins, if he does.)

    I implore Market Monetarists to think about language, slogans and arguments that appeal to the broader public. It is not enough to cluck approvingly at each other. Talk of the need for a strong Fed, for monetary bullishness, for American growth. Describe those concerned with inflation as dithering, fearful, Chicken inflation Littles.

    For example, the term “market monetarists” was invented by Lars, and it works very well.


  5. Gravatar of Rob Rob
    11. October 2011 at 09:58

    “Personally, I’m old-fashioned, and I think it would be inflationary for the central bank to just print money at random to finance government operations. But by the same token, I have no doubt that a determined central bank can create inflation expectations.”

    This seems confused to me.

    If the central bank is to create inflation expectations it has to be prepared to actually increase the money supply if needed and surely it would be a bad idea for that to ever take the form of “printing money to finance govt spending”.

    By the same token the central bank needs to make clear that it will reduce the money supply again when changed expectations leads to reduced demand for money and NGDP forecasts start to rise above target.

    Inflation talk outside of a plan to stabilize AD back to trend and outside of a focus on market-based solution could lead to dangerous policies.

  6. Gravatar of Brett Sheckler Brett Sheckler
    11. October 2011 at 10:20

    I agree with the main thrust of Matt’s argument, but I think it’s worth noting that Japan has been printing money to finance a large chunk of government operations for a long time now, and to say the least, it has not proven inflationary.

    Anyone who reads Matt on a regular basis knows that the reason he is so confident that the Fed/Treasury could create inflation if it wanted to is because he asserts (as Bernanke used to) that if push comes to shove, a persistent helicopter drop of cash will always do the trick.

    I like Matt’s proposal:

    The Treasury creates and sells $300 billion of bonds to the Fed. The Fed lights a match to the pile of bonds. The Treasury takes the $300 billion and sends a $1,000 check to every man, woman, and child in the country. And the Fed and the Treasury tell everyone up front that they are going to keep doing that until unemployment falls below some target level.

    Personally, I would keep the plan but swap out unemployment targeting and replace it with NGDP targeting.

  7. Gravatar of Morgan Warstler Morgan Warstler
    11. October 2011 at 10:36


    WHO CARES abut whether inflation is possible????

    It is.

    But we already know the skeptics are really saying the HEGEMONY will not allow it.

    I mean jesus christ, we’ll be rational expectations people and give Nobels to people who say Fiscal stimulus is bunk because of expectations.

    We’ll say the Fed neutralizes Fiscal and we expect that to happen.

    And on and on, we’ll SLOWLY come to terms with the political realities. At some point, EVERY ONE OF YOU, mentions it, forces yourself to put away the curves and think about what can actually happen…. but you don’t get down into the WHYS and WHEREFORES of the hegemony – because once you accept their rules, there are still plenty of good policy options.

    This is the basic set up:

    To matter in politics, you need MONEY AND VOTES.

    Dems have votes, no money.
    Plutogarchs have money, no votes.

    Tea Party, or even larger, the 53% who pay the income taxes have MONEY AND VOTES.

    And they have biases, they favor themselves.

    Look, if behavioral economics is allowed to exist….

    CERTAINLY, we can recognize Hegemonic Economics which figures out dollar policy and fiscal policy based on what is best for
    the guys who have the MONEY and VOTES.

    Inventing good policy that can get the Progressives what they say they want, and will be allowed to pass by the Tea Party… is the most interesting discussions that can be had about political economy today.

  8. Gravatar of Philo Philo
    11. October 2011 at 11:52

    Historical aside concerning the term ‘quantitative easing’ (from
    “Richard Werner [of Southampton University], who coined the term ‘quantitative easing’ in 1994, . . . says his idea involved efforts to increase credit, because the money transmission system, the banking system, was broken. He derides the monetarists and their obsession with obscure measures of money, and instead suggests a focus on creating credit. . . . ‘[N]ew money . . . is only injected when the money leaves the banking sector and goes into the economy. So far the money has just been passed from central banks to commercial banks,’ he says [in reference to Britain].”
    But the idea that commercial banks would sell their government bonds to the central bank (in QE) and then *just sit on the money they received* does seem strange.
    Later in the article Werner sounds more Sumnerian: “‘The Bank [of England] needs to set a nominal GDP growth target,’ he says.”

  9. Gravatar of Dan Kervick Dan Kervick
    11. October 2011 at 12:10

    Matt is multiply confused. For one thing, he mocks the whole idea of financing additional government spending out of money creation with no new taxes, without apparently realizing that the “helicopter drop” he has embraced so warmly in the past is precisely this sort of operation.

  10. Gravatar of Matthew Yglesias Matthew Yglesias
    11. October 2011 at 12:15

    No, you’re confused. I mock the idea that a $3.5 trillion helicopter drop would have no inflationary impact. If it would have an inflationary impact, that goes to show that a determined central bank can inflate. And if a determined central bank can inflate, then we ought to inflate. Just not that much!

  11. Gravatar of MikeDC MikeDC
    11. October 2011 at 12:18

    More important questions:
    1. Should a determined central bank inflate?
    2. Could a determined central bank fail to stop inflation?

    Some more:
    1. What will a surge of inflation do to the bond holdings in America’s retirement accounts, both public and private?
    2. What will a surge of inflation do to the rates at which the government can borrow money and must pay out social security benefits? How’s about the huge chunk of government funding for medical reimbursement rates?
    3. What will the government do in response to those changes?

    I see people bandwagoning inflation more than I see them bandwagoning Scott Sumner. Which is a shame, because I don’t read Scott Sumner as an advocate of runaway inflation, but I see people using his theories to get them to where they want to be, and the result of where they want to be will be runaway inflation.

  12. Gravatar of MikeDC MikeDC
    11. October 2011 at 12:25

    And if a determined central bank can inflate, then we ought to inflate. Just not that much!

    Matthew Y,
    Please judge the porridge for me. Can you cite methodology or theory for what’s just right, what’s too hot, and what’s too cold? Can the Fed not just control its own actions, but also the actions of the myriad of other players in the game who can affect the outcome?

  13. Gravatar of bryan willman bryan willman
    11. October 2011 at 12:35

    Are not the real issues about controlled reflation vs hyperinflation, and the effective ruin of any net saver that arises from inflating away debt?

    any of us can dream up some mechanically easy scheme to force inflation, and many of these schemes would retire a great deal of debt.

    But how to know and persuade that hyperinflation will not result? And what kind of economy can there be going forward if everybody is in effect told “do not save or invest, and never ever lend, it will just get wiped out by inflation or some other debt disposal scheme.”

  14. Gravatar of Dan Kervick Dan Kervick
    11. October 2011 at 12:57

    OK Matt. You did say that you thought the operation would be inflationary. But what you called “wacky” was the idea “that faced with a deep recession, the government should basically just finance itself by printing money and not bother with the whole taxes thing.”

    Whether such an operation turns out to be inflationary, and to what extent, depends I think on how the money is spent. If you simply disburse the money to random consumers with little lead time, a lot of that money will chase existing goods, including goods whose manufacture cannot be increased in short order without additional investment. The result would be highly inflationary, I presume. But if the government uses new money to place orders from businesses that are running way below capacity, but who can ramp up more output without much more capital investment, then the effect will not be nearly as inflationary – especially if the government simply declares the price it will pay for these goods, which it is perfectly capable of doing, instead of bidding for them.

    But if you want to be old fashioned, why not advocate good old-fashioned tax-financed fiscal action? It would still be inflationary, since it would move money from savings into more active circulation, but not so much. I don’t think plunking more excess reserves into bank reserve accounts at the Fed is going to do anything. As I read the data, total bank reserves are now about 95% excess reserves:

    This hardly bespeaks a strong demand for credit. It looks like any bank that sees a profitable current opportunity for lending can make that loan without spending a single penny to acquire additional reserves from other banks or the Fed. The Fed can stuff these reserve accounts with new money as much as they want. Since banks are already massively over their reserve requirements, the additional reserves appear to make zero difference.

  15. Gravatar of Morgan Warstler Morgan Warstler
    11. October 2011 at 13:10

    I’d suggest everyone listen to Fisher’s recent Blooomberg radio interview:

    1. of course we can have more inflation the Fed can print money.
    2. We have the STAG already, he rightly remembers how much worse it is when you have the FLATION part.

    The fact is SINCE we’re not going to have lots of new efforts at flation, the smartest thing for us to do RIGHT NOW is end all supports of wages and prices.

    We should be having deep and compelling discussions about nuking Davis-Bacon.

    We should be admitting the reason we can’t have infrastructure spending right now is because we can’t push the EPA out of the way and pay work workers minimum wage.

    We are wasting $500B per year on CURRENT public employee salaries that could be paying 20M unemployed $25K per year to give us all massages, mow our lawns, babysit our kids.

    20M unemployed could be employed right now.

    Matty, we both know you despise one simple rule: the folks paying are in charge.

    That is life. Your whole existence is built to try and deny this basic fact. And in the next 8-12 years you are going to learn it brutally.

    Since INCOME tax payers get to decide if government is a good deal, the smartest thing a progressive could do right now is go all in on GOV2.0.

    Play the long game, run the public sector with Internet efficiency, squeeze out 3-5%+ productivity gains YOY, until it is such a good deal, the INCOME tax payers are grateful to let it do more.

  16. Gravatar of John Thacker John Thacker
    11. October 2011 at 13:53

    WHO CARES abut whether inflation is possible????

    It is.

    I think that it’s obvious that it is, but there’s a sizable contingent among progressives that have believed “boy, inflation / monetary expansion would be nice right now, but it isn’t possible.”

  17. Gravatar of Rob Rob
    11. October 2011 at 14:43

    Surely if NGDP-targeting works then we will end up back on the long term trend-line of 3% RGDP-growth and 2% inflation.

    I would hope we can in parallel (to NGDP-targeting) implement some supply-side changes along the lines suggested by Morgan Wartsler that will lead to faster RDGP growth and no need for a constant ongoing money supply growth (ie scrap the 2% inflation trend and have prices fall to accommodate productivity growth).

    All this talk of inflation is making me nervous.

  18. Gravatar of Benjamin Cole Benjamin Cole
    11. October 2011 at 15:15


    Five years of five percent real growth and five percent inflation would delever us bigtime. Moderate inflation has it uses.

  19. Gravatar of Morgan Warstler Morgan Warstler
    11. October 2011 at 15:44

    John, that’s not what anyone is really saying.

    They are talking about the political reality, or the political viability, or making assumptions about the bad effects they presume would happen.

    But you’d have to dig pretty deep to find a bunch of liberals who truly think the Fed cannot print money and cause inflation.

    And wasting time talking about it is meaningless!!

    There is work to do.


    We’re past the inflection point, as I’ve said before IF Scott forces the left to live on monetary stimulus alone, that’s GARGANTUAN change – something worth him spending time pulling Matty along.

    But Scott’s truly compelling argument is the Fed moves last, neuters fiscal.

    The second is mine: the right will keep spending all the money, so the left never gets to pay off voters.

    The third is: government is too complex to spin up lots of cheap jobs.

    Essentially, Scott’s real job is to pry fiscal out of their hands, not sell them on monetary.

    Once they don’t have fiscal deficit spending, they HAVE to accept monetary as their only real lever.

  20. Gravatar of MikeDC MikeDC
    11. October 2011 at 15:52

    Ben Cole,
    The only use I see for “moderate inflation” is potentially greasing the wheels for real growth. Real growth is the only legitimate end.

  21. Gravatar of Rob Rob
    11. October 2011 at 15:53

    Am I missing the point on NGDP-targeting?

    I thought the aim was to boost AD and how that gets converted into inflation v RGDP growth depends on the the aggregate supply curve.

    The point being that what we want is RGDP growth and inflation is just an unavoidable side-effect. Some of comments here talk as if it is an end in itself.

  22. Gravatar of Dan Kervick Dan Kervick
    11. October 2011 at 16:26


    From what I can gather, Bill Woolsey defends your point of view, but some of the other NGDP targetters don’t. I think Matt Yglesias is coming at this issue more from a New Keynesian point of view, and sees higher inflation as more than a mere by-product of the desired policy target, but as an important instrument of some desired policy target as well. But I’m not sure any more.

  23. Gravatar of ssumner ssumner
    11. October 2011 at 16:34

    Yaguar, Yeah, that would do it.

    JimP, Thanks, I actually wrote up a similar piece, but didn’t post it. So I left a comment over at Glasner’s blog—he’s right.

    MikeDC, That too.

    Thanks Ben.

    Rob, That’s right.

    Brett, You said;

    “I agree with the main thrust of Matt’s argument, but I think it’s worth noting that Japan has been printing money to finance a large chunk of government operations for a long time now, and to say the least, it has not proven inflationary.”

    Yes, I’ve pointed that out many times. The helicopter drop doesn’t really solve the problem. The problem is that temporary currency injections don’t inflate. And the BOJ injections were temporary.

    I agree about NGDP targeting, but with all due respect giving everyone $1000 is a horrible idea. We don’t need to run up more deficits, and if we burn the bonds we get too much inflation.

    Morgan, I mentioned you in my newest post.

    Philo, Thanks for that info.

    MikeDC, There will be no “surge” of inflation. There will be a surge of NGDP growth.

    Bryan Yes, and normal 5% NGDP growth is not unfair to creditors–not at all.

    John Thacker, That’s right.

    Rob, You are right, real growth is the ultimate goal. I don’t propose high inflation, most of the extra NGDP would be real.

  24. Gravatar of Dan Kervick Dan Kervick
    11. October 2011 at 17:40

    I agree about NGDP targeting, but with all due respect giving everyone $1000 is a horrible idea. We don’t need to run up more deficits, and if we burn the bonds we get too much inflation.

    I would prefer to see the government spend the money in a targeted way on actual goods and services, rather than just send everybody money. Rather than play the game with the bonds, why can’t the US Congress, in which the monetary authority of the US government is ultimately vested, simply direct the Fed to credit Treasury’s accounts by some definite sum per quarter, and then authorize additional spending amounting to that sum.

    If the spending is money financed, rather than bond-financed, the deficit doesn’t add any new government debt liabilities, so what’s the drawback as far as the deficit is concerned? I thought the deficit hysterians only care about not adding debt.

    How inflationary need such a program be? If the government is purchasing new goods and services, produced from unemployed material and human resources, it is raising T in the equation of exchange along with M. If administered correctly need there be a large jump in the price level?

  25. Gravatar of c8to c8to
    11. October 2011 at 19:00

    now that yglesias is also calling himself a market monetarist its time for a wikipedia entry; please add to:

  26. Gravatar of c8to c8to
    11. October 2011 at 19:06

    quoting scott, and then dan:

    I agree about NGDP targeting, but with all due respect giving everyone $1000 is a horrible idea. We don’t need to run up more deficits, and if we burn the bonds we get too much inflation.

    I would prefer to see the government spend the money in a targeted way on actual goods and services, rather than just send everybody money.

    i initially thought the give everyone a thousand dollars was a bad idea, but actually it worked quite well in australia. It was more immediate than a government infrastructure program which can take years.

    financing it through debt when governments can borrow at next to nothing isnt that bad, although why not just print the money — as our nobel laureate pointed out, borrowing now is financed by money creation later, so why not just finance it now through money creation with less inflation.

  27. Gravatar of c8to c8to
    11. October 2011 at 19:18

    rob is spot on. its annoying that everyone is focussing on inflation. as you say, the agg. supply curve will dictate what portion of NGDP growth goes to real GDP and what will go to inflation.

    as we are under capacity some will certainly go to real GDP. probably a lot.

    but as scott points out certain prices (eg oil) immediately price in future growth so there will be headline inflation probably as real GDP grows.

    its frustrating that most commentators don’t explicitly state what they are talking about.

    inflation is the side effect but it does have some theoretical good points: it reduces the real burden of debts contracted in nominal terms. it acts as sort of a redistribution from nominal capital holders to indebted entities.

    it also might aid labour markets by reducing real wages, which allows unemployed workers to re-enter, and also in my view might play a role in rearranging workers into more productive roles by eroding real wages and making them seek more productive ones.

    but in conclusion, you’re right inflation is the secondary, not the goal. i think people have been focusing on inflation for two reasons: for some on the right, to create fear about “printing money” for political reasons, and on some of the left because they think if monetary policy isn’t creating inflation it’s not doing anything.

  28. Gravatar of John John
    11. October 2011 at 19:23


    For tax financed fiscal action, how about dropping the income tax? That’ll encourage spending, investment, and work in one foul swoop. That’ll create way more jobs than building roads. How many people that you know would join road construction crews if Obama announced a big infrastructure project?

  29. Gravatar of jwes jwes
    11. October 2011 at 22:14

    A modified version of Matt’s proposal might work. The fed gets the NGDP statistics, e.g. 1% growth, calculates the dollar difference between the actual value and the low end of the target range, e.g. $300 billion, buys $300 billion in bonds from the Treasury, which then distributes the money evenly to each American citizen as taxable income. If (when) NGDP is above the high end of the target range, e.g. 7%, the fed sells bonds back to the Treasury and the government has to cut spending or raise taxes to make up the difference. This should guarantee that NGDP is in the target range and we would learn if NGDP targeting worked.

  30. Gravatar of Brett Sheckler Brett Sheckler
    12. October 2011 at 09:48

    It seems like at least a few folks are warming to Matt’s plan.

    Scott. I can’t believe you are really worried that issuing checks and burning $300 billion in bonds would be unduly inflationary if it was pursued with an explicit program of NGDP targeting.

    If a determined Fed can create inflation in today’s environment, it can certainly contain any inflationary impulses created by a relatively modest injection of dollars into the system.

    $300 billion is peanuts when stacked up against the remaining assets on the Fed’s balance sheet and all of the other tools at their disposal to pull on the string.

    And if you think $1,000 checks are too big, you could always start with smaller increments and go from there.

    The key is that Matt’s plan (1) would be guaranteed to change everyone’s expectation about future conditions in the blink of an eye and (2) some portion of the windfall would almost certainly be used to build wealth and/or destroy household debt. We all know that the infusion itself would barely make a dent in household balance sheets, but if pursued as described, it would change expectations.

    Under Matt’s plan, if you are right, the worst case scenario is the Fed has to pull on the string a bit.

    My bet, as you know, is that the combination of the injection itself and the shifted expectations would be enough to bring NGDP growth up to target for the next year or two, but at some point down the road, the Fed would need to live up to its promise to inject more.

    Let’s face it… Households are burdened with some $13 trillion in outstanding debts right now. In income-adjusted terms, at least $5 trillion of this is “excess debt” over and above the Post WWII average. On top of that, the same households have absorbed trillions more in losses to their net wealth.

    We’re talking, here, about households that are in the red by many, many trillions of dollars when compared with previous generations.

  31. Gravatar of MMJ MMJ
    12. October 2011 at 13:07

    Scott wrote: “MikeDC, There will be no “surge” of inflation. There will be a surge of NGDP growth.”

    how do we know? the uk experience of LSAPs was low RGDP and high NGDP. (and before anyone tells me why inflation was high, i’ve read all the explanations from the boe!)

  32. Gravatar of ssumner ssumner
    13. October 2011 at 05:32

    Dan, Spending permanently financed by money creation has been highly inflationary throughout history. If it’s temporary, that’s a different story–but then you end up with the debt overhang.

    c8to, Do you have a link where Yglesias calls himself a market monetarist?

    Thanks for the wikipedia entry.

    I just don’t see the $1000 as needed, monetary policy can do the heavy lifting on its own.

    I agree that people are horribly confused over inflation.

    jwes, There’s no reason to bring in fiscal policy at all.

    Brett, You can’t have it both ways. If $300 billion is as small as you say, then it’s too small to get the job done. The real answer is NGDP targeting, and make the money supply endogenous. Giving people $1000 has zero value-added to that policy.

    MMJ, We can’t know. But NGDP growth is what matters anyway, so who cares about inflation? 100% of the problems that people believe are caused by inflation, are actually associated with unstable NGDP growth. So it’s the right policy even if there is zero RGDP payoff.

  33. Gravatar of Brett Sheckler Brett Sheckler
    13. October 2011 at 09:57

    Scott. It seems I didn’t do a good job getting this across, but I was trying to make the point that Matt’s plan could be a good compliment to your broader push for NGDP targeting.

    The $1,000 by itself doesn’t do a lot (although it would be a meaningful sum for the Median household who has seen steady income drop for three years now). The thing that really matters is that expectations would turn on a dime–for absolutely every player in the economy.

    Remember, the most important part of the plan is that the Fed/Treasury commits to NGDP targeting and making future direct injections in the event they fail to hit their target. There isn’t a single person in America who doesn’t believe such an action would guarantee NGDP growth (some might believe it will all take the form of inflation, but that still shifts the real interest rate).

    What I was trying to suggest above is that, from your perspective, this is really just an insurance plan.

    If you are right about what NGDP targeting will accomplish, the Fed/Treasury will never have a need for another injection.

    If it is the case that the hole households are in is sufficiently deep that traditional monetary actions still have a hard time getting traction, then the Fed has another tool in its quiver–a guaranteed-to-work tool.

    And finally, if it turns out that it is not possible to achieve sustained economic growth without simultaneously expanding HH_Debt/GDP (as we have debated elsewhere), then we are virtually guaranteed to face the problem of over-indebted households at some point in the future.

    In that event, there might be significant value in the Fed having a well-established tool in their quiver that allows them to bypass the need to expand debt to expand purchasing power.

  34. Gravatar of Lars Christensen Lars Christensen
    13. October 2011 at 12:57

    Scott, Yglesias mentions Sweden, Switzerland and Israel as examples of FX policies and monetary policies. While I agree that both the Swedish and the Swiss central banks have done well (or rather fairly well) I have much more doubts about Bank of Israel. To be frank, I never really understood what Stanley Fischer at BoI is targeting. His policies have been rather erratic and seems designed as if he was Fed Chairman and not governor of BoI.

    Furthermore, I am beginning to question how well Riksbanken is handling things. To me it looks like the Swedish central bank has gone back to tightening mode in a rather “Stealth” way over the last 12 months. But that is another matter…

  35. Gravatar of Scott Sumner Scott Sumner
    15. October 2011 at 09:38

    Brett, You may be right, but here’s the trouble I have with this sort of proposal. Giving everyone $1000 is a really radical plan. Yet the Fed is now refusing to do much less radical plans–they seem to think the economy doesn’t need higher inflation. So if they won’t do much milder proposals, how do we get them interested in helicopter drops?

    Lars, I haven’t followed Israel. I agree that Sweden is a bit too tight, and the other “Lars” agrees.

  36. Gravatar of Peter Peter
    15. October 2011 at 11:14

    Scott, Sweden a bit too tight? Our NGDP is 10% below trend.

    And Svensson agreed with the latest decision to keep the repo rate at 2%.

  37. Gravatar of ssumner ssumner
    16. October 2011 at 06:38

    Peter, Interesting. But it’s not enough to simply say Beckworth is wrong. His graph looks right to me. Is his data inaccurate? What specifically is the problem?

    I’m not saying you are wrong, just that I’d need more information on why you and Beckworth reach radically different conclusions.

  38. Gravatar of Peter Peter
    16. October 2011 at 08:03

    I don’t know why his graph looks so different. Revised GDP figures? He uses quarterly figures while I use rolling four quarters. I guess that’s why my graph is smoother.

    Here’s a nominal quarterly GDP graph from the Fed:

    Looks a lot like my version. And 10% below trend seems plausible.

  39. Gravatar of ssumner ssumner
    17. October 2011 at 06:57

    Peter, If you start your trend line at around 2001, then David looks right.

  40. Gravatar of Peter Peter
    17. October 2011 at 08:18

    If you start the trend at 2001 and go up to 2011, I agree. I used 1993 – 2008 for my trend line. Isn’t it more sensible to stop at 2008 when figuring out if the current recession pushed us off trend?

  41. Gravatar of Brett Sheckler Brett Sheckler
    18. October 2011 at 14:14


    I understand your point, and I don’t disagree.

    There are two reasons, though, why I brought up Matt’s “plan”:

    (First) Given the amount of intellectual fog surrounding what the Fed is doing and what they believe, I think it is useful to have a rhetorical tool that disperses the fog.

    (Bernanke says the Fed is not out of ammo but will not take aggressive action at this time, and one of the reasons he can get away with that is that many people actually DO think he is out of ammo.)

    Matt got fed up with this dynamic, so he came up with rhetorical tool. Now, he can frame any conversation by asserting, up-front, that the problem of too-high unemployment could be solved tomorrow if the Fed/Treasury really wanted to solve it. And to back up his statement, he can lay out a one-paragraph plan that absolutely everyone recognizes would have to work.

    People might hate the plan because they think inflation would get out of control or because, somehow, it just feels immoral to print money and hand it to people. Notwithstanding these reactions, though, in less than one minute, the question of “Is the Fed out of ammo?” is swept off the table.

    I just wish Matt would trot out this rhetorical tool more often than he does. I also think you might find it handy in certain instances.

    The second reason I brought the plan up (to you in particular) was because of our conversations about the accumulation of debt.

    As I said above, I think it might be useful to have a well-established tool at our disposal that allows creation of purchasing power without the simultaneous creation of debt.

    For what it’s worth, here is how I see the future playing out:

    1. At some point in the next decade, central banks will embrace NGDP level targeting (hopefully sooner rather than later).

    2. Your stature goes up a few notches (which probably involves a Nobel at some point).

    3. Economics (and central bankers) start paying serious attention to the role debt-accumulation plays in an expanding (and contracting) economy.

    4. It becomes clear that the best way to manage expansion of purchasing power is by navigating a balance between traditional mechanisms that rely on debt/credit-creation and some form (or perhaps many forms) of pure helicopter drops. By then, though, they will no longer be called helicopter drops.

    Of course, it might turn out that I am wrong about that last one. As we enter the era of NGDP targeting, though, it would ease my mind to know that the issue of real debt accumulation (and its relationship to economic expansion) continued to be on your radar screen.

  42. Gravatar of Scott Sumner Scott Sumner
    18. October 2011 at 18:06

    Peter, No, because David assumed Sweden was over trend in 2008, which is a perfectly reasonable assumption (I don’t know either way.)

    Brett, Well I certainly appreciate the Nobel comment, but realistically it goes to big time researchers, not policy advocates.

    I see your point about convincing people that monetary stimulus is possible, but don’t forget we don’t want to scare off those who worry about hyperinflation. So it’s a balanacing act.

    I do advocate more pro-saving policies, and regulations cracking down on things like subprime mortgages, so I wouldn’t say I ignore the debt issue, but it’s obviously not my focus.

  43. Gravatar of Peter Peter
    19. October 2011 at 01:02

    In that case, it would seem more reasonable to base the trend on 1993 – 2004 (or something like that). It seems weird to include 2008 – 2011 with the largest drop in NGDP in recent times. If you use 2001 – 2011 that would make up 33% of the data for the trend line.

    Another difference is that I use quarterly data without seasonal adjustments (I don’t need that since I use rolling four quarters). Not sure if that might make a difference.

  44. Gravatar of Peter Peter
    19. October 2011 at 01:39

    If I use 2001 – 2011 for trend, I also get current NGDP back on trend.

  45. Gravatar of Peter Peter
    19. October 2011 at 02:08

    A trend based on 1996 – 2006 gives a current 4.6% NGDP gap.

  46. Gravatar of Peter Peter
    19. October 2011 at 02:26

    I found the error in my 10% figure. It should be 6.5%. So there’s still a decent gap, but not as big as I thought. It makes more sense since our unemployment is halfway back to the natural rate.

  47. Gravatar of Scott Sumner Scott Sumner
    29. October 2011 at 06:05

    Peter, Thanks for that data. I have an open mind on Sweden–much hunch is that the employment data is the best indicator right now (although not always.)

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