Michael Hatcher on NGDP targeting

Marcus Nunes directed me to a recent post by Michael Hatcher, discussing NGDP targeting:

(1) To the extent that future output is uncertain, nominal GDP targeting does not provide an anchor for inflation expectations. Nominal GDP targeting does provide an anchor for nominal spending. What it does not do, however, is provide a clear focal point for inflation or price level expectations. To see this, note that a nominal GDP target of N* will be met when P.Y = N*, where P is the price level, and Y is real GDP. Hence, the central bank should promise to set P = N*/Y, making the price level countercyclical. Since future output is uncertain, there is no fixed point on which price level expectations will gather given a promise to move the price level inversely with output. The same reasoning also applies to inflation, except that expected future inflation will be inversely related to expected output growth under (credible) NGDP targeting. All this matters because having a clear focal point for inflation or price level expectations is crucial for keeping actual inflation low and stable. Indeed, there is good evidence from bond yields that inflation targeting has lowered inflation expectations and reduced inflation uncertainty (see here and here). This would be lost under nominal GDP targeting, putting the economy at risk of higher and more variable inflation.

There are several points that need addressing.  A switch to NGDP targeting does not necessarily result in higher or lower average inflation; rather inflation might become more countercyclical.  The trend rate of inflation is just as likely to fall, as it is to rise.  It’s not even clear that inflation would be more unstable, as inflation targeting is probably not the best way to stabilize actual inflation.

But there’s a far more important issue here.  In my view, inflation expectations don’t matter very much; it’s NGDP growth expectations that matter. The so-called “welfare costs” of inflation, such as “shoe leather” costs and the cost of excess taxation of investment income, actually apply better to NGDP growth, for the simple reason that NGDP growth is more closely tied to nominal interest rates than is inflation.  So if inflation expectations do become more unstable, that’s actually a point in favor of NGDP targeting, as long as NGDP growth expectations become more stable.

(2) Nominal GDP targeting is not easy to communicate to the general public. Proponents of nominal GDP targeting have argued that it would be easy for central banks to communicate monetary policy in terms of a target for nominal spending. But as I argued in point (1), the problem comes when individuals attempt to forecast the two variables (price level and real GDP) that make up nominal GDP. For instance, the guidance nominal GDP targeting gives about future inflation is minimal, since there are an infinite number of price level and output combinations (or, equivalently, inflation rates and growth rates) which are consistent with any given nominal GDP target. Hence, any inflation rate is desirable, given wild enough swings in output. In such circumstances, central banks would presumably be forced either to deviate from the nominal GDP target (losing credibility) or to specify circumstances in which the target would not apply (big shocks). But then the target itself becomes state-contingent and its simplicity is lost.

I don’t see why central banks would deviate from NGDP targeting in response to wild swings in inflation, because it is NGDP growth, not inflation, that matters.  It is NGDP growth shocks that destabilize labor markets and financial markets, not inflation shocks.  Indeed there was a positive inflation shock in the first half of 2008, and yet NGDP growth was slowing.  In retrospect, it is NGDP growth that should have been stabilized in 2008—that was the much more important shock. Unfortunately, the Fed and ECB paid too much attention to the inflation shock in mid-2008, and as a result monetary policy was too tight.

The public would actually find it much easier to understand NGDP targeting, whereas the public is completely mystified by inflation targeting. They don’t even know what inflation is. The public thinks that inflation should measure the rise in the cost of living, the way we live now.  Thus they would include the average amount of money that people spend to buy a TV set in a price index, whereas we actually put in the price of a quality-adjusted TV set, which is vastly different.  Even worse, they don’t understand the purpose of inflation targeting.  In 2010, core inflation had fallen to 0.6% and Bernanke announced the Fed would try to increase inflation.  The public should have jumped for joy; “Great, we are going to get closer to the inflation target of 2%”.  Instead there was outrage that the Fed was trying to increase the “cost of living” for Americans who were already suffering from recession.

When the public thinks about “inflation” they tend to implicitly hold their nominal income constant.  Thus they wrongly think that inflation lowers their living standard, and they thought Bernanke’s 2010 policy would reduce their real income. Implicitly they equate “inflation” with “supply-side inflation.” But of course the Fed has no impact on supply-side inflation, it can only influence demand-side inflation. And an increase in demand-side inflation (which is what Bernanke was trying to achieve in 2010) would actually increase the real incomes of Americans.

Now let’s assume that in 2010 Bernanke had said that a healthy economy requires adequate growth in the incomes of Americans.  Suppose he said that the economy was weak due to slow growth in incomes, and that the Fed would try to generate 5% growth in our incomes.  That would have probably provoked much less outrage from the general public than his call for higher inflation.  It would also have had the merit of being more accurate, as Bernanke was actually trying to boost demand (NGDP) and he hoped most of the rise would be in RGDP, not inflation.  When he suggested the need for higher inflation in 2010, he actually meant that he wanted more NGDP, hoped it would be mostly RGDP, but expected it would also lead to more inflation.

3)Credibility would be strained in the face of demand shocks under nominal GDP targeting. Scott Sumner and others have argued that one benefit of nominal GDP targeting is that it provides flexibility in response to supply shocks. It would not require, for example, that the central bank raise interest rates in response to stagflation: a rise in inflation would be permitted, temporarily, while output is weak. But large supply shocks are fairly infrequent. If we look instead at demand shocks, nominal GDP targeting looks less attractive. Suppose, for example, that the nominal GDP target is 100, but that nominal GDP overshoots to 105 due to the price level and output being higher than expected in the face of a positive demand shock. Nominal GDP is now at the level it should be next year, assuming an NGDP target path that rises by 5% per annum.  As a result, the central bank now wants nominal GDP to flatline next year. It is therefore faced with three unattractive choices: keep both inflation and output growth at zero; combine positive inflation with negative output growth; combine positive output growth with deflation. The likely result is that the central bank would not follow through in these circumstances, and its credibility would be eroded. Enough such episodes could reduce credibility to the point where nominal GDP targeting would have to be abandoned.

Once we factor in negative demand shocks and the zero lower bound on nominal interest rates, things look even worse. For instance, suppose that nominal interest rates are near the zero lower bound and nominal GDP undershoots to 95, i.e. 5% below the target of 100, due to a series of negative demand shocks that lower the price level and real GDP. Now, given trend nominal GDP growth of 5%, the central bank would have to promise to raise nominal GDP by 10% next year in order to meet the new target of 105 (=100*1.05). Ten percent(!) – through inflation or output growth, or some combination – when the economy is at the zero lower bound. What central bank can credibly promise that? That would take a massive amount of credibility, probably too much to be plausible in practice.

Here I think Hatcher partly misses the point.  The main purpose of NGDP targeting is to reduce the severity of demand shocks. For instance, in mid-2008 inflation in the US had risen well above target, and hence the Fed tightened monetary policy, causing NGDP to fall 3% over the next year.  This was a powerful negative demand shock, caused by the Fed’s tight money policy.  This shock made the financial crisis much worse, and also sharply increased unemployment.  Under NGDP targeting the Fed would have had a much more expansionary monetary policy in late 2008, and hence the demand shock would have been much smaller.

Hatcher might reply that even with the best of intentions there would still be negative demand shocks under NGDP targeting, as monetary policymakers are not perfect.  I agree.  But the make-up required to reach the old trend line would actually be stabilizing under NGDP targeting.  For instance, if the Fed makes a mistake and NGDP growth overshoots the target, then they need to gradually reduce NGDP to bring it back to the trend line.  Normally a policy of reducing NGDP growth might cause a recession.  But if you start from a position where NGDP has overshot the target, then you are starting from a position where output and employment are above their natural rates.  So the contractionary monetary policy is actually stabilizing, as it brings you closer to the natural rate.  Something like that happened in Australia in 2008, when the economy (NGDP) had overheated.  A sharp slowdown in NGDP growth in 2009 did not cause a recession in Australia, but rather brought output and employment closer to the natural rate.  So these moves to bring NGDP back to the trend line would actually be less controversial than you might assume, if you simply had looked at the NGDP move without reference to where the economy was relative to the natural rate.

How about the zero bound problem?  Ironically, Michael Woodford endorsed NGDP level targeting a few years ago precisely because it does a better job of handling the zero bound problem.  When NGDP falls well below trend, it’s hard to reduce real interest rates under an inflation-targeting regime.  In contrast, under NGDP targeting you can call for a temporary period of above average nominal growth, which reduces interest rates relative to both inflation and (more importantly) NGDP growth.  Now of course there is still the underlying problem of having concrete policy tools that are effective at zero interest rates, and I’ve written zillions of posts on options for doing so.  But for any given policy tool, it would be more effective at the zero bound under NGDP level targeting (or price level targeting) than under inflation targeting.Here’s another way of thinking about it.  Asset prices are closely linked to changing expectations of two or three-year forward NGDP.  In late 2008 and early 2009, those expectations plunged, and this sharply depressed asset prices—also hurting the balance sheets of highly leveraged banks like Lehman Brothers.  Under NGDP targeting, two or three-year forward NGDP expectations are more stable, and hence asset prices are more stable. That would tend to reduce the severity of demand shocks.  In modern macro models, current moves in aggregate demand (NGDP) are closely linked to future expected changes in demand.

To summarize, the best argument for NGDPLT is not that it handles “shocks” better than other regimes such as inflation targeting, but rather that it recognizes that most so-called “shocks” are simply bad monetary policy, and NGDPLT makes for a more stable economy by reducing the frequency and severity of those monetary shocks.

PS.  I’ve been catching up on old podcasts from David Beckworth, which I missed the first time around.  This morning I listened to the one with Ramesh Ponnuru, which does a really nice job explaining the intuition behind NGDPLT.  The podcast with George Selgin provides another excellent perspective on the basic idea.



32 Responses to “Michael Hatcher on NGDP targeting”

  1. Gravatar of Victor Victor
    6. September 2016 at 04:36

    Changing a few words.
    (1) To the extent that future output is uncertain, inflation targeting does not provide an anchor for Nominal GDP expectations. Inflation targeting does provide an anchor for inflation. What it does not do, however, is provide a clear focal point for NGDP growth or NGDP level expectations. All this matters because having a clear focal point for NGDP growth or NGDP expectations is crucial for keeping unemployment low and stable.

  2. Gravatar of Benjamin Cole Benjamin Cole
    6. September 2016 at 04:55


    Where to start?

    Anyways, what is so important about a “clear focal point for inflation”?

    And cannot economists ever speak in English?

    Okay, so with NGDPLT there is not an inflation target.

    Big deal. That’s better!

    The RBA has an inflation target of 2% to 3%, but is below target. Thailand as a 1.5% inflation band around 2.5% target, and has no inflation. The People’s Bank of China has a 4% IT, and is well below target. The ECB is in deflation. Japan has a 2% IT, and is in deflation.

    I see a pattern!

    For that matter the Fed has a 2% IT on the PCE, often misperceived as a 2% ceiling, not target, on the CPI (perhaps even by FOMC officials). The Fed is below target. Oh gee, what a surprise.

    I wonder what minute fraction of the public that even knows the Fed has such a target.

    When did economists become obsessed to the point of fetish with reported inflation rates as opposed to real economic growth?

    Should not the topic of the day be why are global central banks nearly universally falling below their ITs while mired in slow growth?

    Indeed, the effing “focal point” ITs seem useless, except to generate economies that drift to perma-recession ZLB-land.

    The sooner fiat-money central banks kill off ITs the better.

    The oddity: For decades, there has been long-winded sermons on the risks of fiat-money central banks, so they were made independent.

    The real risk? That independent fiat-money central banks would asphyxiate commerce through tight money. As they have.

    If Hatcher would set aside dogma for five minutes and look around….

  3. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    6. September 2016 at 04:58

    Demand shocks, ‘are [almost] always and everywhere a monetary phenomenon.’

  4. Gravatar of Philo Philo
    6. September 2016 at 05:59

    You write as if you wanted the Fed to target actual NGDP, so that it might miss its target and have to “catch up.” But in fact your proposal (as I understand it) is that the Fed target NGDP *expectations* for the near future–for definiteness, let us say one year in the future. The Sumnerized Fed cares nothing for actual NGDP: it focuses instead on the one-year-in-the-future-NGDP-expectations trend line. With an NGDP futures market, or some other means of assessing expectations, the Fed, by constant adjustments, need *never* “miss its target.”

  5. Gravatar of Majromax Majromax
    6. September 2016 at 06:07

    >> Suppose, for example, that the nominal GDP target is 100, but that nominal GDP overshoots to 105 due to the price level and output being higher than expected in the face of a positive demand shock. Nominal GDP is now at the level it should be next year, assuming an NGDP target path that rises by 5% per annum. As a result, the central bank now wants nominal GDP to flatline next year.

    > Here I think Hatcher partly misses the point.

    I think the deeper point-missing is on the strictness of the level target. Hatcher’s argument here applies just as well to a price-level target as an inflation target, but the idea of a crawling price-level target is not very controversial.

    In fact, Hatcher ascribes more diligence to central banks meeting an NGDP target than they currently show in meeting inflation targets. Worldwide, central banks have seemed quite content with waiting for much longer than a year for inflation to ‘normalize’ despite serious, persistent, and one-sided deviations from that target.

    But if this is seen as a serious problem, then the solution is itself simple: emphasize that the level part of the target is a “medium-term” target. If central banks try to target 5% NGDP growth over the next 10 years (for example), then they also have the short-term freedom to target NGDP growth rates of (eg) 3-7% in the short term. That would permit a deviation of present-NGDP of up to 20% from its current target before the 10-year goal would be unachievable.

    >> Ten percent(!) – through inflation or output growth, or some combination – when the economy is at the zero lower bound. What central bank can credibly promise that? That would take a massive amount of credibility, probably too much to be plausible in practice.

    Here, Hatcher seems to forget that central banks run printing presses.

    The “credibility problem” of the ZLB lies in its inflation target. If central banks do undertake helicopter drops – permanent expansion of the monetary supply with no built-in reversal mechanism – then conventional economics suggests the price level should jump, in practice causing very large short-term inflation and leaving long-term inflation expectations unchanged.

    That breaks an inflation target on both sides: it overshoots in the near term and has no mechanical basis for fixing the intermediate to long terms.

    In practice, this means that central banks have conducted unconventional monetary policy with an itchy trigger finger, promising to yank back or sequester monetary expansion if ever it results in new spending.

    On the other hand, if the central bank follows a level target (either price level or NGDP), then the initial ‘shock’ of adjustment is exactly the desired effect.

    We have no idea how much helicopter money it would take (in one lump sum) to reach an inflation target, if that is even possible; we do have a very good idea how much helicopter money it would take to meet a price-level target.

  6. Gravatar of Gary Anderson Gary Anderson
    6. September 2016 at 06:15

    Keeping the banks lending, when after a crash they tighten lending and fear for their survival, requires the Fed to actively buy bad paper off the banks’ balance sheets so they will keep lending. That is countercyclical and makes perfect sense. They would have started buying CP paper way back in August 2007 in order to save the good subprime.

    It seems to me that off balance sheet banking would be a hindrance the NGDP targeting because when the collateral for the housing market is suspect, it migrated back onto the balance sheet of the banks by billions of dollars and the CP market failed.

    But off balance sheet banking is a creation of Greenspan to keep risk off the balance sheets of the banks through structured finance. Even Greenspan said that bad counterparty behavior, ie lending to anyone with a pulse, can destroy the plans of structured finance.

    Also, because so much of the collateral for structured finance (derivatives) is in the form of public bonds, their price would no longer be stable with NGDP targeting.

    But NGDP targeting could eliminate the need for off balance sheet banking altogether. But then, subprime lending may go away, and nobody can afford traditional lending, with a big down payment.

  7. Gravatar of Brian Donohue Brian Donohue
    6. September 2016 at 06:18

    Scott, very good post.

    Patrick Sullivan, I like that. Friedman for the 21st century!

  8. Gravatar of Majromax Majromax
    6. September 2016 at 06:21

    As an addendum, I also don’t think the “no anchor for inflation” is a point in Hatcher’s favour.

    To start with, the current inflation target already provides little anchor for long-term inflation. This is a bit surprising (it’s in the name!), but a perfectly-executed inflation targeting regime will still have random deviations from that target over the short-term. This means that the price level will follow a random walk with a mean increase at the target, and in turn the long-term (log) price level will differ from the target imputed by the inflation rate by O(sqrt(#years)) times the year-over-year standard deviation.

    Yes, NGDP targeting provides a worse anchor than this because NGDP is RGDP times the price level, but on the other hand the NGDP level in the future is fixed within constant deviation because of the target. The only way the inflation rate can deviate from a long-term anchor is by the RGDP growth rate having a consequential long-term deviation.

    But therein lies the rub: the entire point of monetarist-inspired demand analysis is that over the long-run money is neutral, and that monetary policy cannot cause a real output to sustainably deviate from a supply-side-set potential.

    If this supposition is wrong and money is in fact not neutral in the long term, then this enhances the argument for NGDP targeting. The most plausible way for monetary policy to affect RGDP growth is to the negative, by suppressing capital formation and technological development in ways that cannot be easily ‘caught up’. This again most plausibly happens when monetary policy is too tight and we are caught in a low-growth, low-inflation regime – one inconsistent with a properly-implemented NGDP target.

  9. Gravatar of dtoh dtoh
    6. September 2016 at 06:33

    Gosh this guy Hatcher sounds well versed on public policy. I guess he must support Hillary.

  10. Gravatar of Jose Romeu Robazzi Jose Romeu Robazzi
    6. September 2016 at 12:56

    Paradigm is everything.

    It is amazing how many smart people who studied economics start from a model where the economy has a price level (something that “exists” per si and therefore can be measured) and real growth (also, something that can be “measured”) and combine the two in order to “produce” an artificial number called NGDP growth.

    What if one started thinking about the following world: people “measure” NGDP, then, following a certain price level model they estimate inflation and RGDP. RGDP growth and inflation estimates are interdependent statistics that are dependent on the price level MODEL used. NGDP is the real thing, RGDP and Inflation are fictitious quantities that have some use helping us understand the real world, but are not something we “measure”.

    Once one start thinking like that it is much easier to understand NGDP targeting …

  11. Gravatar of H_WASSHOI (Maekawa Miku-nyan lover) H_WASSHOI (Maekawa Miku-nyan lover)
    6. September 2016 at 14:17

    I want to enjoy stock trading under NGDPLT

  12. Gravatar of Major.Freedom Major.Freedom
    6. September 2016 at 16:21

    Sumner, the contempt and hatred you show for millions of other people who have never harmed you or your property, is astoundingly pathetic.

    You wrote:

    “The public should have jumped for joy; “Great, we are going to get closer to the inflation target of 2%”. Instead there was outrage that the Fed was trying to increase the “cost of living” for Americans who were already suffering from recession.”

    “When the public thinks about “inflation” they tend to implicitly hold their nominal income constant. Thus they wrongly think that inflation lowers their living standard, and they thought Bernanke’s 2010 policy would reduce their real income.”

    They do not wrongly think that. They RIGHTLY think that. It is right because that is and has been the historical experience millions of wage earners have had with inflation.

    Wage rates do not IN GENERAL keep up with inflation. This is because inflation of the money supply does not raise everyone’s incomes equally at the same time. When the central bank inflates, and member banks expand credit, the additional incomes that take place affect some people and then those people increase their spending which then increases the incomes of others.

    I recall making this point many years ago on this blog, and your response at the time was…you guessed it…contempt to for those workers. You effectively said they deserved it because they could not or did not, for whatever reason, attract a higher wage for themselves. This response proved to me that you are clueless about the monetary system. Perhaps purposefully clueless, or maybe something more dubious. For it is literally impossible for ALL workers, in response to central bank inflation, to successfully bargain for a higher wage. This is because the additional incomes simply have not reached their businesses yet. Employers cannot pay higher wages on an ongoing basis unless their own incomes increase first.

    There is a difference between models and reality. If your model assumes that everyone’s incomes rise at the same rate, as if the central bank is engaging in OMOs with everyone, then the problem is YOU, not the poor victims of the inflation tax.

    Stop blaming the victims for your fallacious economic worldview.

    It is a fact of life for millions of people that inflation really does lower their purchasing power, because their wages are not able to keep up with the inflation. Yes, at some point inflation does increase virtually everyone’s incomes, but by the time the happens, there has already been another wave of inflation that as raised prices.

    Inflation of the money supply, for the bajillionth time, does not raise everyone’s incomes, nor does it raise all prices, equally at the same time. It raises incomes and prices heterogeneously, cross-sectionally, as well as temporally, across industries and firms, i.e. between individual people.

    Are you so oblivious that you cannot even recognize the existence of millions of seniors on fixed incomes? Are we supposed to just pretend they don’t exist? That when prices rise because of central banks, it is their own fault? Paging Machiavelli.

    This blog is disgusting.

  13. Gravatar of Gary Anderson Gary Anderson
    6. September 2016 at 16:58

    I argued by email that inflation was a tax. Now, it isn’t too bad if you work for the government and get cola raises. But others can find it difficult. For objecting in this way Scott says I am stupid, Major. You don’t seem stupid.

    I understand that no one wants to bounce into negative rates and deflation. I get that. But Scott would be the first to complain that auto workers used to be paid big bucks. He can’t have it both ways. Either wages keep up with inflation and balloon, or they don’t and inflation becomes a tax.

    When monetarism stops working, Friedman called for Helicopter Money, non sterilized. But no one wants to stick their necks out and push for that solution.

    NGDP is important to watch, for sure. Scott proved it. But, NGDP targeting is just a fancy name for asset buying. And that means trickle down, maybe. It looks like to me though that the G20 is concerned that all this asset buying has not done much for mainstreet and helped Wall Street more.

  14. Gravatar of Don Geddis Don Geddis
    6. September 2016 at 19:33

    @MF: “contempt for those workers“. No, no — you completely misunderstood. It was contempt for you, and for your ignorant naive theories of macro. Not contempt for the workers.

    Employers cannot pay higher wages on an ongoing basis unless their own incomes increase first.“. Also false. Your understanding of micro seems no better than your understanding of macro.

    It is a fact of life for millions of people that inflation really does lower their purchasing power“. False again. The inflation rate is not correlated with changes in real wages. I know you don’t want that to be true, but we have to deal with the world as it is, not the dream world in your fantasies.

    @Gary Anderson: “Scott says I am stupid, Major. You don’t seem stupid.“. That’s because of the Dunning-Kruger effect.

  15. Gravatar of Gary Anderson Gary Anderson
    6. September 2016 at 22:05

    Oh, Don, nice study, to a point. Scott doesn’t work with people but you know, the Fed won’t listen to Scott, so maybe he needs more political support. He won’t get it if he only wants to work with other economists. He is dreaming.

    Even Trump, who I don’t support, makes the correct argument, that interest rates are too low and the economy is based upon that collateral being in massive demand. Trump says that yields must go up. Unfortunately, they won’t unless you ban treasury bonds from the derivatives markets as collateral. And that will not happen unless you had some asset based securities to take the place of UST’s and there would be an added cost, a substantial haircut.

    You don’t have to be an economist to figure that out. Scott is a smart guy, we know this. But he never mentions the demand for bonds, the massive hoarding of bonds due to structured finance. I would have a lot more confidence in him if he acknowledged the derivatives market demand for bonds.

    Major is quite correct, to those who do not have wages that keep up with inflation, inflation becomes a tax. Asset inflation is a tax. I have not had a cola raise on my government retirement or maybe 1 percent for years. I know inflation is pretty tame. Over time, a wage/price spiral could help those with mortgages pay a lesser amount of their budgets. If people, who are now permitted to put 50 percent of their income towards the mortgage are able to survive until inflation takes hold.

    And Don, I have no problem with Scott making a mathematical argument for his cause. I do not have the ability to distinguish his arguments from those say, of Cullen Roche. But I don’t care. I know that asset buying has made the rich richer and the poor poorer, or at least farther removed from where the rich are. It does not require advanced math to figure that out. All you have to do is look around.

    Scott has admitted that his system of NGDP targeting and asset purchases is not fair. But because it is not fair, people like Trump arise, and hatred of the Fed increases.

    So, perhaps, Don, you and the elite are victims of the Dunning-Kruger effect, not being able to discern the things us lesser iintellects really do understand. There are things we understand that economists and technocrats cannot understand.

    I bet that those boys who did the study don’t understand that some technocrats can’t see the forest because they are lost in the trees.

    I once worked for a travel agency for a brief time when I was younger. I did fine, but the geologist who worked with me, who took copious notes, could not do as well. He was far more mentally advanced than me, finding places for big business to mine, as a geologist, but he could not see the forest for the trees in selling airline tickets. Go figure.

    Scott cannot see the forest of massive bond demand. He just cannot see it, yet he is far smarter than me. My oldest son was a whiz at Calculus and got an MBA from Bentley at age 22. But he cannot see that Sandy Hook was a hoax no matter how many pictures I show him of fake actors using fake methods and failing to produce real tears. I can’t convince him that the CNN video of the cops storming the Sandy Hook school were storming a school with rounded curbs when the school of the alleged shootings had only square curbs.

    There is intelligence and there is intelligence. Some people do not want to see things, no matter how gifted they are. So, I think Dunning-Kruger have simplified a complex area of human behavior. For example, Judge Judy doesn’t fail to tell everyone she is smarter than the people who appear before her.

    The Apostle Paul, no mental midget, warned the elect in Christ that there would be people coming through preaching, who were not elect in Christ, but who had better verbal gifts than Paul himself.

    Bertrand Russell rejected the concept of certainty, but the elect in Christ have certainty. God has been revealed in them. And as Paul said, God chooses those with less achievement to show his power in order to ultimately humiliate those who reject the truth. Dunning-Kruger showed an ignorance that they didn’t know they possessed by relying on Bertrand Russell. http://www.newcovenanttheology.com/p/new-covenant-theology-doctrine.html

    I appreciate gifts that people have, that are greater than my own. I am not jealous, because I have won the grand prize, and the vast majority of the gifted will not win that prize. I don’t rejoice in that, as few are chosen. Very few.

    I appreciate the skills of those who have made it to Stanford University, but I doubt if a single Stanford grad will see the Kingdom of God, although I hope I am wrong. Intelligence has nothing to do with the grand plan. Revelation has everything to do with it as Paul said God was pleased to reveal his Son in Paul. Ultimately, that is all that matters.

    I am keenly aware that others have skills I don’t have. I am happy for them, but I am happier for me. Scoffers will think it is because I cannot comprehend that I believe the way I do. But don’t forget what I have said. We will have the discussion about it when time is no longer in existence. Those who continue to scoff until the end of their days will find that discussion to be unpleasant.

  16. Gravatar of W. Peden W. Peden
    7. September 2016 at 01:14

    Great post!

    The possible IT responses that I could think up all involved switching inconsistently between strict and flexible IT.

  17. Gravatar of Chuck Biscuits Chuck Biscuits
    7. September 2016 at 04:03

    Ah, Don Geddis is back, his temper is matched only by his ignorance. I guess he’s done licking his wounds from this exchange:


  18. Gravatar of Chuck Biscuits Chuck Biscuits
    7. September 2016 at 05:10

    Don Geddis’ own ignorance on display:


  19. Gravatar of Ray Lopez Ray Lopez
    7. September 2016 at 05:33

    Simon Wren-Lewis on NGDP (from his blog linked to the Hatcher link): “Now of course this [why NGDPLT works] is just one result from a highly stylised model, and Sheedy shows that it is sensitive to assumptions about the duration of debt contracts and the degree of risk aversion.”

    Examine the caveats: highly stylized and sensitive to assumptions about (1) debt contract duration and (2) risk aversion. First, duration of debt contract. In this day and age of CDOs, where debt contracts are bundled and sold to third parties, not held by the banks, where is the risk? It’s offloaded to risk adverse people. Second, today’s investors are not cautious banks holding debts instruments from the original borrower, like back in grandpa’s 1930s, and afraid of liability/asset mismatches and runs on the bank, but risk-adverse non-bank people who buy CDOs. In this day and age of TIPS, CDOs, and the two caveats above, what relevance does NGDPLT have? Answer: {0}.

    Don’t expect Sumner to comment on this, except with a one-liner gutter response.

  20. Gravatar of Ray Lopez Ray Lopez
    7. September 2016 at 05:42

    @myself – obviously I meant risk NON-adverse people who buy CDOs.

    Engineer would understand better than most of you readers how, when you change the domain and assumptions behind a model, it no longer works. The assumptions behind Sumners NGDPLT is that people “fear NGDP changes” (they do not), they “fear inflation” (largely not true) they suffer “money illusion” (not true) and, besides the sticky question of sticky prices (which I say are small, but let’s leave this aside) that people are ‘risk adverse’. Also not true. Today people have conceded that there’s no job security, yet life goes on. Today people have ARMs and paper is marked to market based on the present interest rate, whatever it is. Only in Sumner’s world, based on Depression era 1930s society, are these fears real. In today’s CDO/TIPS environment, where everything is indexed, marked-to-market, and securitized, Sumner’s 1930s tech ‘NGDPLT’, a form of price level targeting, is as irrelevant as the Model T.

  21. Gravatar of rayward rayward
    7. September 2016 at 09:34

    Of course, these comments about inflation – that anybody (Sumner) who would promote inflation must be stupid or evil – confirm the need to replace inflation targeting with NGDP targeting. The resistance among economists to something new (NGDP targeting) isn’t that surprising, but the attachment to something old that didn’t work, and didn’t work in dramatic fashion, is shocking. I am referring to the new book by Edward Conard in which he unabashedly promotes the (supply side) policies of the George W. Bush administration. It’s as though Conard didn’t notice what those policies delivered, and hasn’t noticed that since 2009 all we’ve gotten is monetary stimulus – supply side on steroids. I would compare Sumner’s proposal for NGDP targeting with Roger Farmer’s (counterintuitive) proposal to increase interest rates (coupled with the alignment of interest rates paid on reserves) together with market intervention in stocks as a backstop in case the rise in interest rates proves to be contractionary. My view is that we cannot inflate (asset prices) our way out of stagnation – it just digs a deeper hole and makes the inevitable fall that much harder. Better to have a controlled retreat from inflating asset prices than a crash. I expect Farmer will get even more resistance to his proposal (it is counterintuitive) than Sumner has gotten to his proposal (which is not).

  22. Gravatar of Gary AndersonAnderson Gary AndersonAnderson
    7. September 2016 at 13:17

    Chuck, the crisis was ignored because inflation was targeted and it was stable through mid 2008 while GDP was cratering. On that fact I have to agree with the MMers. But actually if monitoring GDP means a roller coaster of asset and bond price fluctuations, that would seem to be very complex.

  23. Gravatar of James Alexander James Alexander
    7. September 2016 at 13:48

    Excellent post.
    Jose Romeu Robazzi nails one key challenge. NGDP is real. RGDP is the construct, despite statisticians telling us they are able to measure “output” independently of value of output.

    At the end of the day total expenditure, income or sales value (of output) are actual amounts people can all see and understand. We need a bit of a revolution in appreciation that deflated RGDP is the really tricky thing to create, not NGDP.

  24. Gravatar of Gary Anderson Gary Anderson
    7. September 2016 at 15:22

    @Chuck, that article you provided is not completely fair. It is true that the Fed ignored GDP because inflation was stable. That was a big mistake. They also ignored LIBOR spiking, and the crashing of the CP market that funded subprime. They ignored about everything important.

    The problem with NGDP targeting would be that prices of bonds and assets would be very fluid and not very stable. It is hard to use something as collateral that is very stable.

    It would be nice if treasury bonds were replaced as collateral. I am no fan of Trump, but he kindles an interesting subject, about the false economy. The MMers know this, that money in the financial economy doesn’t make it to main street. Somebody told Trump to say the same thing by saying interest rates need to rise, though he said in May interest rates were fine.


  25. Gravatar of Gary Anderson Gary Anderson
    7. September 2016 at 15:23

    Sorry, it is hard to use something as collateral that is NOT very stable.

  26. Gravatar of Tom Brown Tom Brown
    7. September 2016 at 15:49

    O/T, Scott pass this one along to Ben Cole: https://www.washingtonpost.com/politics/trump-calls-for-defense-sequester-to-end/2016/09/07/7dda8548-7513-11e6-be4f-3f42f2e5a49e_story.html

  27. Gravatar of Tom Brown Tom Brown
    7. September 2016 at 21:11

    … this too: http://www.redstate.com/leon_h_wolf/2016/09/07/donald-trump-president-navy-will-begin-executing-michigans-video/

  28. Gravatar of Chuck Biscuits Chuck Biscuits
    8. September 2016 at 03:52

    Except, the entity of concern to market monetarists is *expected* NGDP, not actual NGDP. There’s a difference between them, you know.

  29. Gravatar of James Alexander James Alexander
    9. September 2016 at 01:42

    Chuck Biscuits
    Good to remind us, but just try to imagine “expected” “inflation” or even worse, “expected” “RGDP” growth. Monetary policy only ever deals in expectations, nothing else drives action. Facts are history.

  30. Gravatar of James Alexander James Alexander
    9. September 2016 at 01:42

    Chuck Biscuits
    Good to remind us, but just try to imagine “expected” “inflation” or even worse, “expected” “RGDP” growth. Monetary policy only ever deals in expectations, nothing else drives action. Facts are history.

  31. Gravatar of Chuck Biscuits Chuck Biscuits
    9. September 2016 at 03:57

    @James Alexander

    Completely irrelevant. Expected NGDP is about as measureable as “actual” RGDP or the “real” inflation rate. So market monetarist claims about the latter while advocating the former (when they’re not dishonesty conflating it with NGDP) amount to special pleading.

  32. Gravatar of ssumner ssumner
    9. September 2016 at 09:38

    Philo, I think people understand that point.

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