Mike Konczal provides two arguments against monetary offset

Mike Konczal has a new post with two arguments against monetary offset.  In both cases he suggests that the predictions of “market monetarists” have not panned out.  But in only the first case is the prediction even being made by a market monetarist.

1.  In the first case he discusses the fact that a while back David Beckworth presented a graph showing year over year changes in quarterly NGDP.  This may have been fine for David’s purpose, showing multiyear trends in NGDP growth.  But you cannot use this for event studies unless you are very careful.  The reason is simple:

If you look at year over year NGDP growth in early 2013, right after the austerity began, it looks pretty bad.  But that’s because most of the growth being measured occurred in 2012, before the austerity even began.  Thus quarterly y-o-y numbers for 2013:1 are basically showing growth in 2012.  Only the 2013:4 number will show (almost) purely 2013 growth, post austerity growth.  We don’t have that number yet, but forecasts suggest it will be about 4%, the same as NGDP growth in the first three quarters (annualized), and higher than the 3.8% NGDP growth in 2012 (again using 4th quarter to 4th quarter.)

2.  The second case of MM failure uses a prediction of Matt Yglesias discussing inflation forecasts for 2013, which didn’t pan out.  Where do I begin?

a.  Yglesias isn’t really a MM on the monetary offset issue, he favors fiscal stimulus and believes it works.

b.  MMs say inflation is a meaningless number; NGDP is what matters.  So what if inflation is lower as long as NGDP growth is higher?

c.  MMs say that what really matters is how policy affects macro forecasts, not how actual results differ from market forecasts. The reason I expected very little effect is that my reading of the markets in late 2012 is that they expected very little effect from austerity.  Just more of the same in 2013.  Here I’m actually closer to Krugman than Konczal.  To the extent that the outcome differed from what markets expected it was due to exogenous shocks outside the model, as Krugman says. My problem with Keynesians isn’t that 2013 turned out stronger than expected (in RGDP terms it was stronger than I expected too), but rather that at the beginning of the year I saw no evidence that the markets even expected any significant austerity-caused stagnation.  I’m not saying they expected no effect, but nothing significant.

PS.  Yglesias is somewhat MM on issues like NGDP targeting and monetary policy effectiveness at the zero bound, but not monetary offset, which is the specific issue being considered in this debate.

PPS.  I got this information from a Mark Sadowski comment, which also had this to say:

3) Matthew Yglesias’ post specifically addresses the Cleveland Fed’s January 2013 inflation expectations chart which as Marcus Nunes noted at the time was mislabeled:


“…Unfortunately, the chart is wrong! The curves were mislabeled…”

So basically Konczal is attacking a test set up by a non-Market Monetarist on a measure that Market Monetarists think would be greatly inferior to a market for NGDP expectations (if it only existed), and the premise of that particular post was itself based on a graph the Cleveland Fed mislabeled.



34 Responses to “Mike Konczal provides two arguments against monetary offset”

  1. Gravatar of JJriverrun JJriverrun
    10. January 2014 at 11:54

    To what degree is there a disagreement about monetary offset between MM and NKs?

    I’ve always read both as believing that the fed can offset fiscal policy, but they could also chose not to. Keynesians seem to argue that the fed should chose not to offset fiscal policy, AKA ‘promise to be irresponsbile’. Bernanke seems to imply that he would not offset fiscal expansion whenever he testifies at congress. MMs seem to argue that NGDPLT should be used to lock in monetary offeset, forcing the fed to tighten if fiscal policy (or anything else) is causing runaway NGDP growth or to loosen in response to fiscal policy that slows NGDP growth.

    Maybe I’m reading it wrong, but I don’t think anyone would argue that the central bank’s resposne to fiscal policy is irrelevent. Konczal seems to be suggesting the fed has limited ‘omnipotence’ when it comes to monetary offset, but he doesn’t exactly say what is the limiting factor is.

  2. Gravatar of Donald Pretari Donald Pretari
    10. January 2014 at 12:01

    Scott, I thought you were making Two Claims..
    1…If MM works, we will not need a Stimulus.
    2…If you attempt to, for example, Influence Expectations via Fiscal Stimulus, the Fed can, in effect, sabotage this attempt if it chooses to do so.
    So, Fiscal Policy can only work in tandem with the Fed, or, in my view, Reinforce what the Fed has chosen to do. Hence, there is no such thing as an Independent Fiscal Stimulus.

  3. Gravatar of Mike Konczal Mike Konczal
    10. January 2014 at 12:12

    What about the decline in the Fed’s projections for 2013?

  4. Gravatar of ssumner ssumner
    10. January 2014 at 12:35

    JJ, Yes, they could choose not to offset, buy why in the world would they not want to?

    You said:

    “Bernanke seems to imply that he would not offset fiscal expansion whenever he testifies at congress.”

    Many Fed officials, including Bernanke I believe, have talked about the need to do monetary offset. Specifically to do more monetary stimulus when there is austerity. In fairness they usually indicate that they do not expect to fully offset, but I’m not convinced, I think what they are really saying is “don’t put all the burden on us” That’s a different situation.

    Donald, I’d put it this way, fiscal stimulus can only work if the central bank is incompetent. If the central bank does not try to achieve its AD target, then fiscal stimulus can work. If they do their job, it doesn’t work.

    Mike, Given NGDP growth will be around 4% in 2013, why does your December bar show a lower number? I’d guess two factors:

    1, The 4.1% RGDP (6% NGDP?) number was not yet available in mid-December.
    2. You have core inflation not the GDP deflator.

    Also, are those Fed forecasts Q4 to Q4, or y-o-y?

    Again, it is clear that 2012:4 to 2013:4 is the right number, and that’s going to be around 4%. BTW, you can actually make an argument for 2013:1 to 2014:1, which is likely to be above 4%. That’s because even 2012:4 to 2013:1 growth includes some growth occurring in late 2012:4, which was extremely weak.

  5. Gravatar of Reader223 Reader223
    10. January 2014 at 15:30

    I’m curious to hear a response to some saying that growth wasn’t really that strong since a large component of it was investment inventories rising. I’m interested in hearing what the counterpoint to this is.

  6. Gravatar of Michael Byrnes Michael Byrnes
    10. January 2014 at 16:10

    Scott explained the right way to think about monetary offset in one of his Russ Roberts podcasts:

    If growth and employment were worse than they are now, would the Fed be doing more?

    If the answer to that question is “yes”, that’s monetary offset.

  7. Gravatar of c8to c8to
    10. January 2014 at 17:31

    The other thing people need to realise is monetary offset is going to be imperfect (or undpredictable) given the central bank is targeting inflation or other indirect ( or nonsensical) measures of “AD”

  8. Gravatar of Morgan Warstler Morgan Warstler
    10. January 2014 at 17:43

    I want to make an important point:

    “I shall not today attempt further to define the kinds of material I understand to be embraced within that shorthand description [“hard-core pornography”]; and perhaps I could never succeed in intelligibly doing so. But I know it when I see it, and the motion picture involved in this case is not that.”

    Monetary offset is like hard core porn.

    Because not only do we know it when we see it:

    “If growth and employment were worse than they are now, would the Fed be doing more?

    If the answer to that question is “yes”, that’s monetary offset.”

    This forces DeKrugmanpinion to admit that the REAL QUESTION IS THE FED GETTING WHAT IT WANTS?!?

    And even Scott sometimes plays the “well they SAY they want 2%” card, so they are failing.

    But in the back of all our minds we know that 2% is a bone the Fed throws to whiners, in reality they are comfy with sub 2% inflation. Because opportunistic disinflation.

    Let’s look at it like hardcore porn:

    1. Congress / President decides to fire a ton of public employees and cut taxes to match it – meaning no austerity and no stimulus… govt. shrinks.

    The Fed would be DAMN SURE to make sure that the economy soared… bc this is not hard core porn in the eyes of the Fed, this is deep intimate love – this is art.

    2. Congress / President decides to hire public employees and cut taxes – meaning both barrels of fiscal stimulus.

    Now we have a Fed on guard, they a don’t want the economy to soar, or else liberals will say growing govt. is good, but that bit pay raise for public sector, well that’s some pretty gross damn near obscene stuff to put up with.

    3. In 2013 Congress / President both RAISE TEXAS and CUT SPENDING, now this is WORSE RIGHT? This is TERRIBLE right?

    But no, the Fed basically does what it would do in #2, but with a little extra punishment for Obamacare and tax hikes.

    See the issue here is that DeKrugmanpinion what they don’t get, because Scott won’t tell them, is that the real reason NGDPLT works is that it causes #1.

    But during the discussion about 2013, #3 is pretty good proof that the Fed did something, bc we KNOW they looked at this porn.

    To check my premise ask yourself this:

    What if in 2013 Congress HIRED 1M PUBLIC EMPLOYEES and RAISED TAXES?

    We’d have gotten less QE3 and a faster taper.

    Because the very thing DeKrugmanpinion is hoping for that is outright pedo-bestiality to the Fed.

  9. Gravatar of Morgan Warstler Morgan Warstler
    10. January 2014 at 17:47


    The Fed doesn’t just have Monetary Offset, the Fed has deep personal opinions about what is acceptable and unacceptable fiscal policy. To really judge MO, in a non-NGDPLT world, you need to come to terms with this bias.

  10. Gravatar of Mike Sax Mike Sax
    10. January 2014 at 17:52

    “See the issue here is that DeKrugmanpinion what they don’t get, because Scott won’t tell them, is that the real reason NGDPLT works is that it causes #1.”

    See Morgan that’s why I like you. All the other MMers will not admit this is the punchline

  11. Gravatar of Jon Jon
    10. January 2014 at 20:34

    Scott the link in the pps is broken:


    goes to:


  12. Gravatar of ssumner ssumner
    10. January 2014 at 20:44

    Thanks Jon, Is it fixed now?

    Reader223, Inventory investment is just as much GDP as any other kind of growth.

  13. Gravatar of Saturos Saturos
    10. January 2014 at 21:57

    So this just happened: http://www.washingtonpost.com/politics/whitehouse/former-bank-of-israel-head-gets-fed-vice-chair-nod/2014/01/10/133b2552-7a0d-11e3-a647-a19deaf575b3_story.html

  14. Gravatar of Saturos Saturos
    10. January 2014 at 21:58

    Mike, FWIW I think policy is going to become increasingly Sumnerian over the coming years, and government will increasingly NOT become like Morgan’s #1. (And Scott’s policies will work.)

  15. Gravatar of Ralph Musgrave Ralph Musgrave
    11. January 2014 at 03:30

    JJriverrun says “the fed can offset fiscal policy, but they could also chose not to.”

    Scott replies, “Yes, they could choose not to offset, buy why in the world would they not want to?”

    Strikes me the answer is simple. The Fed would not offset fiscal stimulus if it thought that stimulus was just right or inadequate.

  16. Gravatar of Morgan Warstler Morgan Warstler
    11. January 2014 at 06:51


    Scott will tell you that NGDPLT is the best defense against growing government…. no FDR / Obama crisis moments.

    He’ll tell you further under NGDPLT Fiscal has a no or even a negative multiple… silencing or weakening the voice of MOAR GOVERNMENT SPENDING during slow downs.

    He’ll tell you IF there isn’t NGDPLT, and there is going to be Fiscal Stimulus, the best kind would be tax cuts, and more to the point employer side tax cuts.

    He’ll tell you he’s a pragmatic libertarian.

    I’m not saying he agrees with my analysis, I’m saying his compass points already towards certain outcomes.

    So now my analysis, and PLEASE just game it out:

    NGDPLT is a HARD CAP on nominal (not real) growth.

    A hard cap of 4.5% NGDPLT over 2014 would mean something like $62B a month.

    And we’d immediately under NGDPLT start to get:

    1. short term monthly reports about WHO got the $62B. Was it inflation? Was it real growth? Business Insider will #eyetwitch all of this.

    2. long term projections from CBO saying “if Congress does X, rates will have to go up or down”

    Now Saturos, the government is not productive, when they finally stopped measuring Federal productivity it was 1996, and it had fallen below .8% a year.

    What do we call it when we give raises to people above their productivity gains?

    We call it INFLATION.

    And under NGDPLT, we only have $62B to dole out and we don’t want ANY of that to be inflation do we?

    no Saturos, we all hate inflation, unless we need it to goose the economy.

    Now let’s mentally model a huge boom in the economy driven by real growth, let’s say it is the full 4.5% and rates are going to have to go up…

    And CBO put out a report in response to Rand Paul that asks it to model shutting down the US POSTAL SERVICE.

    The reported “hit” from the Fiscal Austerity is NO LONGER THE # PEOPLE LOOK AT.

    I repeat, nobody talks about the hit to the economy.

    Instead the CBO reports that rates can actually go DOWN.

    Now Saturos, what am I missing here?

  17. Gravatar of ssumner ssumner
    11. January 2014 at 08:21

    Thanks Saturos.

    Ralph, Not sure what your comment means. If the central bank has a target, and tries to hit it, they offset. So what are you saying vis-a-vis the Fed target?

  18. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    11. January 2014 at 09:24

    So, Mike Sax, are you on board with your boy Brad?


    ‘…the fact that the reason the unemployment rate is trending down is not because the employment-to-population ratio is rising but because labor force participation is falling.

    ‘To the extent that those dropping out of the labor force will return when the labor market strengthens, the declining unemployment rate is irrelevant-the strength of the labor market is then best measured by the employment-to-population ratio.

    ‘To the extent that those dropping out of the labor force won’t return when the labor market strengthens, the declining unemployment rate coupled with the flat-lining employment-to-population ratio is an absolute and total complete disaster: a permanent reduction in the efficiency of the American economy at matching potential workers who could use jobs with potential jobs that could use workers, and a permanent injury to America’s wealth and productive potential.’

    Obamanomics is ‘an absolute and total complete disaster’. Wonder when he’ll be guest hosting for Rush Limbaugh.

  19. Gravatar of Ralph Musgrave Ralph Musgrave
    11. January 2014 at 09:45


    It’s true that if a central bank thinks it will hit its target, then it will offset fiscal policy.

    However, if some fiscal stimulus has been implemented and the CB thinks it’s inadequate, then far from offsetting it, the CB will augment it with some monetary stimulus so as to hit its target. I.e. as JJ said, CBs “could also chose not to” offset.

    Also I don’t agree with the MM claim that because CBs CAN OFFSET fiscal policy, that therefor there is something wrong with fiscal policy. I think there’s just as much wrong with monetary policy (in particular the fact that it’s distortionary, as we’ve discussed before). So my preferred policy is a mix of monetary and fiscal.

  20. Gravatar of Tom Brown Tom Brown
    11. January 2014 at 12:19

    Mark A. Sadowski: O/T, what do you think of this?


    P.S. Did you get your $50 from Vincent?

  21. Gravatar of Mark A. Sadowski Mark A. Sadowski
    11. January 2014 at 12:47

    Tom Brown,
    In December I spent a whole week debating stone on the underconsumption hypothesis issue at Interfluidity:


    That exchange was the inspiration for three other posts by…




  22. Gravatar of Mark A. Sadowski Mark A. Sadowski
    11. January 2014 at 12:50




    and Nick Edmonds:



  23. Gravatar of Mark A. Sadowski Mark A. Sadowski
    11. January 2014 at 13:06

    Tom Brown,
    In my discussion with stone I pointed out a Fed paper that showed that in 2000 the savings rate decreased with income:


    I have much more empirical evidence but if you read the discussion stone isn’t really interested in evidence.

    I enjoyed the praise that Winterspeak and JKH gave me. Personally I found the conversation with stone to extraordinarily frustrating as it was clear to me his mind was completely closed.

    Ramanan’s model is very good, thus I perplexed that he isn’t also skeptical of the underconsumption hypothesis. And Nick Edmond’s model is superb and captures the whole idea elegantly.

    And while I’m at it, not only do the rich not save, corporations don’t save. The evidence for the idea that corporations save on behalf of their stockholders is also weak.

    In fact Edward Lambert of Angry Bear is firmly convinced that the rich are net borrowers via corporations. He is constantly harping about “financial repression” because he thinks low interest rate policies subsidize corporate borrowing and thus make their rich stockholderseven wealthier.

    So which is it? Are corporations huge savers or are they huge borrowers? It depends on which which theory of the undeserving rich you buy into. But if you’re more concerned about empirical evidence you know that both extremes are false.


  24. Gravatar of Mark A. Sadowski Mark A. Sadowski
    11. January 2014 at 13:32

    Tom Brown,
    As for Steve Roth’s post there are several problems.

    He says:

    “Just to emphasize how problematic “saving” is as a measure to evaluate this spending question, consider how important “imputed income” is in the BEA measure of Personal Saving. By far the biggest portion comes from imputed rent, which is itself closely tied to property values hence unrealized capital gains (from heavily leveraged investments), at least in the medium to long run. This even though capital gains are not, according to most national accounting usage, “income.””

    There’s a reason why capital gains are not included in GDP and that’s because it’s *not* income derived from the production of new goods and services. So he goes to all the trouble of undoing the careful work that the BEA does in order to make sure that GDP is measured properly, simply in order to prove his thesis.

    Note that he asserts that imputed rent is closely tied to property values which is absolutely false. In fact one of the biggest complaints raised about the housing bubble was that PCEPI measures the cost of shelter through imputed rent rather than the price of houses because imputed rent did *not* show any evidence of a housing bubble.

    Next he shows a graph of nominal personal savings and nominal personal savings excluding imputed income. He doesn’t say why we’re supposed to find it so alarming but presumably it’s because the gap between the two grows wider over time. Except if you put it over a demoninator, say something sensible such as disposable personal income, you get a graph like the following:


    Note that the gap was widest in 1950 and it *narrows* over time until it averages between 4% and 5% from 1980 on forward, albeit with a large amount of volatility.

    And his graphs showing that consumption is falling relative to assets are equally meaningless. The ratio of assets to income has a long running historical trend upward and is higher in more developed nations than in less developed. How on earth is this evidence in favor of the idea that the rich save more out of the income that they derive from the production of new goods and services than the poor?

    P.S. Vincent was extremely timely in sending me the $50. I’ll have to send him an email thanking him.

  25. Gravatar of Tom Brown Tom Brown
    11. January 2014 at 13:51

    Mark A. Sadowski,

    Much thanks for taking the time to read that piece, comment, and point out related posts and debates. Have a good one!

  26. Gravatar of Tom Brown Tom Brown
    11. January 2014 at 14:01

    Mark, why didn’t you leave your comment on Asymptosis and/or Angry Bear?

  27. Gravatar of Mark A. Sadowski Mark A. Sadowski
    11. January 2014 at 15:19

    Tom Brown,
    I’ll think about it. But the post is relatively old, and frankly, after my ordeal with stone, I’m sick to death of trying to convince people that the underconsumption hypothesis is nonsense. Evidently it is a zombie myth that simply refuses to go away.

  28. Gravatar of Mike Sax Mike Sax
    11. January 2014 at 15:56

    “Mike, FWIW I think policy is going to become increasingly Sumnerian over the coming years, and government will increasingly NOT become like Morgan’s #1. (And Scott’s policies will work.)”

    Saturos, my assumption is that Scott’s policies and Morgans are one in the same.

  29. Gravatar of Becky Hargrove Becky Hargrove
    11. January 2014 at 16:25

    Mike Sax,
    I just don’t get it. Why would you assume that the policy outlook of any two people is the same? Not only are Morgan and Scott very different people, all Market Monetarists have a different take on what is optimal. Should MM policies have a chance to be implemented, they will reflect a consensus of different views. To be sure, a nominal targeting rule is simple enough. It is the growth trajectory and whether to compensate for (recent)lost output, that will not only have to be compromised amongst MMs but everyone else as well.

  30. Gravatar of Tom Brown Tom Brown
    11. January 2014 at 21:47

    Mark, sounds reasonable. BTW, have you every visited Mish Shedlock’s site? I happened to go there today … but it occurred to me while reading some of the comments that someone like you could really tear the place apart. 😀

    That’d be fun to watch.

  31. Gravatar of ssumner ssumner
    12. January 2014 at 09:04

    Ralph, It makes no sense to say monetary policy is distortionary. The only alternative to monetary policy is barter. What sort of money policy is distortionary? Is NGDPLT distortionary? If so, why?

  32. Gravatar of Morgan Warstler Morgan Warstler
    12. January 2014 at 14:36

    Scott, that’s a very broad definition of Monetary Policy.

    If we had competing private currencies, or say global BTC, there’s no “monetary policy”

    There might be some code that says “never print money” but a money freely chosen amongst the top 1/3 “the deciders” – sans government, they aren’t going to be worried about unemployment – just which services their money has:

    1. security
    2. privacy
    3. near zero transaction cost


    I guess we could call those features “Monetary Policy” but if the government ITSELF becomes a money exchanger and not a money issuer, what exactly is Monetary Policy?

  33. Gravatar of ssumner ssumner
    13. January 2014 at 05:01

    Morgan, If currency is privately issued then the policy of those private issuers is “monetary policy.”

  34. Gravatar of Ralph Musgrave Ralph Musgrave
    16. January 2014 at 00:21


    I actually explained why monetary policy is distortionary in an answer to Mike Friemuth after your 3rd Jan post, “Diogenes never met Joe Weisenthal”. But perhaps you didn’t read it. So I’ll explain again.

    Having the Fed buy assets (mainly government debt) channels money into the pockets of a relatively small section of the population: the asset rich. The latter than find alternative and similar investments, which is why the stock market has done well. In contrast, spending by the asset poor (i.e. Main Street) is pretty much unaffected, as is government spending.

    In contrast, fiscal stimulus can channel money to all sections of the population, plus it can boost private spending by the same amount as government spending (or at least it can aim to do that).

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