Not much point in stabilizing something that can’t be measured

[I’m at a conference now and won’t have time to respond to comments for a few more days.  Here’s an old post I never listed.  I might dig up another old post tomorrow.  I’ll read all comments when I return.]

Saturos sent me an interesting piece on the UK economy:

Both intellectually and practically, monetary policy has become something of a mess. Before the crisis, the Bank of England was guided by a simple and absolute inflation target, which it was relatively successful at meeting and was easy to understand. But since the credit crunch, it has taken on another purpose – that of bringing about a return to sustainable growth. This has brought the Bank into conflict with its primary objective. Since the crisis began, inflation has consistently been well above target, but for a brief dip in 2009, and it has twice been above 5pc.

.  .  .

Sticking to the inflation remit has become something of a charade but, ridiculously, the Bank still pretends that this is what it is trying to do. It is to be hoped that the new Governor, Mark Carney, can bring more clarity and openness to the Bank’s endeavours. Don’t expect miracles.

Fiscal policy has been equally badly wrong-footed. Lack of growth has derailed the Government’s deficit reduction plan, threatening certain fiscal crisis down the line in the absence of evasive action.

What’s more, the unwritten compact between Government and Bank of England, under which the Bank is supposed to compensate for tight fiscal policy with monetary activism, seems to be breaking down. At last week’s meeting, the Monetary Policy Committee decided to do nothing even though it judges risks still to be on the downside. To the chagrin of George Osborne, the Chancellor, Sir Mervyn seems to be saying there is little more that monetary policy can throw at the problem.

Mind you, the data as they stand would be enough to paralyse even the most sure-footed of policymakers into inaction. Can it really be true that an economy which has created more than a million private sector jobs over the past two and a half years is showing no growth at all?

Equally hard to understand is why the UK’s export performance continues to look so lamentable. The eurozone crisis provides only part of the explanation, since even Spain and Greece have done better on exports than Britain, and that’s without the “benefit” of a sharp devaluation in the currency.

Britain’s exceptionally large services sector, and its fast-growing digital economy, may provide partial answers to all these puzzles. Once you strip out disruptions to, and structural decline in, North Sea oil revenues, then there has been some underlying GDP growth.

Moreover, if you think of much of the growth that took place in the pre-crisis bubble years as essentially just the “candyfloss” of an out of control financial and property sector, then today’s stagnation looks much easier to understand. Service industries in general, and financial services in particular, are notoriously difficult to measure, both in terms of their output and contribution to exports.

More confusion in the UK over the roles of fiscal and monetary policy–nothing new there.  But what interests me is the perception that prices can’t really be measured in the service economy.  Is that just a minor problem?  Not if services are 80% of GDP.  If we can’t measure prices, what possible benefit could there be to stabilizing prices?  Can someone show me a model that says that welfare is improved if we stablize prices than cannot actually be measured?  Obviously we are a long way from the “menu costs of inflation,” because menu prices can be measured.

I don’t have much to say on the British productivity puzzle, except that it doesn’t matter.  Indeed it doesn’t matter for two distinct reasons, which are both worth discussing.  First, because monetary policy cannot affect productivity in any meaningful (noncyclical) way.  So there is no reason for the central bank to worry about the issue.  The BoE might (and I emphasize ‘might’) be able to put the British people back to work.  But once they’ve done that they cannot wave a magic wand and make them as productive as Germans or Americans, or as unproductive and Chinese and Indians.

The second reason why productivity doesn’t matter is that it is not needed to determine the proper target path for monetary policy.  If you really believed the BoE should target some sort of imaginary “inflation rate,” then we’d need to estimate productivity, in order to know how much of NGDP growth was “real” and how much was inflation.  But that’s not necessary if you target NGDP growth, despite claims to the contrary by Mark Carney:

The main drawback of an NGDP level target in this regard is that it imposes the arbitrary constraint that prices and real activity must move in equal amounts but opposite directions. As potential real growth changes over time, either the nominal target will have to change or else it will force an arbitrary change in inflation in the opposite direction. The challenge of determining the UK’s potential growth rate at present highlights that this is not an academic concern (see answer to question 23). Another consideration is that statistics like nominal GDP are subject to revision, and these revisions can be large.

I’ve addressed revisions numerous times—it’s not a significant problem for NGDPLT.  But the growth estimate problem reflects a widespread misconception that the “welfare costs of inflation” come from high and unstable inflation.  In fact, they come from high and unstable NGDP growth. So inflation need not be measured or controlled.  It’s only use is to provide fodder for parlour room debates over how fast “living standards” (and what’s that?) are rising or falling.

Back to the Telegraph article:

Looking at business investment, it was on a declining trend from long before the crisis and, to the extent that it was happening at all, there was a disproportionate emphasis on commercial property, great swathes of which now lie empty. Bulldozing this unwanted surplus would perhaps be the best solution, or at least converting it into housing.

So there’s another big chunk of past growth that has turned out to be of little or no long-term value. Strip these things out and it is by no means clear that the rest of the economy is suffering the crippling decline in productivity widely assumed. To the contrary, much of the anecdotal evidence points to significant advances, especially in the digital economy, which is growing faster in Britain than almost anywhere else.

According to a report by the Boston Consulting Group, the UK which according to the leading Shopify agencies, is now home to the largest per capita ecommerce market and the second largest online advertising market anywhere in the world.

Much of the growth in these markets, the productivity gains they drive, and the intangible benefits they deliver, are not caught by official GDP figures, which only attempt to measure the market value of the economy. In a paper just published, Jonathan Haskel of Imperial College Business School and others find that measured real value added has been understated by 1.1pc since the end of 2010 because of failure to capture intangible investment. Take this into account and there has in fact been no fall in productivity since then.

These musings lead to three conclusions. First and foremost, the Chancellor needs to act swiftly to recalibrate fiscal consolidation so as to give growth a supply-side, tax-cutting shot in the arm. Second, he should answer calls from both Sir Mervyn King and Mark Carney for a review of the Bank’s monetary remit. Finally, something has to be done about the GDP data, which beyond their capacity for political knock-about, have become about as useful as a chocolate teapot.

The concluding paragraph is perfect.  And I’d add that this whole discussion reminds me that even NGDP is really not optimal.  I’ve always thought a nominal wage target was the theoretical ideal, albeit not politically feasible.  NGDP was a pragmatic second best option.  But surely we can do better than NGDP.  Does anyone know what the British national income data looks like?  Is it more reliable than NGDP?  If it’s revised, what types of income receive the greatest revision?  If the BoE could keep the total national income, or even the wages and salaries portion of income, growing at a steady 4% per year then they could forget about inflation, RGDP, productivity, jobs, NGDP, etc, etc.  Then get on with the supply-side reforms.



38 Responses to “Not much point in stabilizing something that can’t be measured”

  1. Gravatar of Rien Huizer Rien Huizer
    15. February 2013 at 20:54


    Mr Carney has probably tried to preempt criticism that he may be a member of a dangerous, Sumerian cult.

    Let’s see what happens in the UK next, it cannot get much worse.

    It is becoming a slum on the periphery of the EU and maybe one outside the city walls.

    For some reason that sounds a bit like the position of Singapore before she left Malaysia (or was kicked out as Malaysians would have it). LKY turned Spore from a giant slum on the edge of Malaysia into a pretty prosperous country (by neighbourhood standards) in a few years, and by international standards in three decades.

    A lesson for the UK? LKYs are not made anymore and the model, in LKY’s own words, require a choice between good government and democracy. I have no idea what kind of economics would work in the UK but there is not much supply side to be reformed left, the monetary authorities are generally well-informed and -educated (but are at the mercy of dishonest politicians who have mainly opportunistic reasons for policy (including policy around CB independence)). IF one would be able to commit to some form of NGDPLT policy at all , it would probably require a great deal of persistence, internal cohesion and maybe stealth on the part of the BoE. The politicians would alter it when they would see fit and if it would not make life in the slum a lot more attractive quickly (in time for elections) then at least the foreigner and his cult can be blamed…But knowing that BoE staff and hangers on would probably not commit themselves too far anyway.

  2. Gravatar of Saturos Saturos
    15. February 2013 at 22:52

    Scott Sumner: “I don’t believe in living standards”

  3. Gravatar of Saturos Saturos
    15. February 2013 at 22:52

    Scott Sumner, again: “… surely we can do better than NGDP.”

  4. Gravatar of marcus nunes marcus nunes
    16. February 2013 at 03:48

    Scott, now that many influential people are warming-up to NGDPLT, don´t start saying “surely we can do better”. That way nothing will change.

  5. Gravatar of Peter N Peter N
    16. February 2013 at 05:55

    Yes! Considering all the definitional, technical and practical problems with measuring inflation, it’s ridiculous to target it.

    Case in point, this Bloomberg article arguing that we’ve been massively underestimating rent inflation.

    The use of imputed rent for owner occupied housing, makes this particularly serious. It also effects NGDP (which uses imputed rent), but not as much.

    Meanwhile congress is cutting funds for measuring economic statistics.

  6. Gravatar of Becky Hargrove Becky Hargrove
    16. February 2013 at 07:42

    What with the ongoing confusion as to what comprises nominal (and non-monetary definitions certainly don’t help here, they make nominal appear exclusionary instead of inclusionary) I too say don’t rock the boat!

    Chocolate teapot or no, even though the stability of aggregate income is greater than prices, there remains the issue that local economies (reflecting larger economies) tend to build or create wealth structures that in turn create certain forms of service sector flow, and perhaps for that reason the two need to remain linked with a NGDP definition. However, measurement forms for both could be provided to show how they diverge or remain similar based on whether such service flow definitions actually “take” (i.e. commercial property able to fulfill its purpose).

    When one thinks about the measure of aggregate income, it becomes easier to extrapolate consumption basket potentials based on that particular measure, which to me is part of the beauty of the measure. Such consumption possibilities also point out possible elasticities in finance offers which are actually in reason for a given population. Of course, if it were only that simple. As populations have lost access to manufacturing and related wealth creation at local levels, they sometime try to stretch the process with arbitrary service valuations designed to capture higher end wealth from elsewhere. But the primary problem with this mechanism in the present is the fact that income flows continue to be arbitrarily derived from only certain facets of knowledge wealth, technology and innovation to the exclusion of much potential. Ultimately wealth formation needs to be held differently than it is now, but even that ideal still falls under the same potential nominal income measure. The problem is the link between services and how communities still are trying to find sustainability. Perhaps the traditional NGDP definition captures that best.

  7. Gravatar of Rademaker Rademaker
    16. February 2013 at 07:52

    With respect, I suspect that you’re ignoring that the effect of monetary policy on productivity and real GDP can be sharply negative when it raises incentives for the finance sector to engage in rent-extraction rather than productive investment. For example when the guarantee that any negative effect to NGDP from ponzi-financing will be counteracted with the debt monetization that rewards such behavior. And no, just that the Fed monetizes the government’s debt does not mean it’s just seigniorage that distributes to society as a whole; the Fed’s actions in this regard are predictable, so bond investors price it in and pocket the proceeds from it.

    When these policies send the economy into an NGDP stable, real GDP sinking inflationary depression for this reason, I doubt your argument here will be an effective defense.

  8. Gravatar of John Papola John Papola
    16. February 2013 at 08:08

    Doesn’t NGDP also suffer from blindness to intermediate spending and, perhaps, asset spending (including spending on prior goods like art, used cars, existing housing, etc)? Couldn’t excessively loose monetary policy fail to show up in NGDP, at least in the so-called “short run” because of run-ups in intermediate and asset spending that ends up being malinvestment (starting housing projects in 2005 that won’t be profitable in 2007 even with stable NGDP growth).

    It seems like if the basic ideal is stability (or growth stability) of MV (or PT) that there’s no reason to define either as purely spending on final goods rather than all spending in a given period. I understand why, for double-counting purposes, GDP is focused on final goods so that it can be a reasonable proxy for total value of output created. I don’t understand why monetary policy would aim at that target, given a view that the purpose of monetary policy and macro is to maintain monetary equilibrium so that good old classical Say’s law / Adam Smith action can produce growth of real output, income and living standards.

  9. Gravatar of Saturos Saturos
    16. February 2013 at 08:39

    John, ironically you’re the central planner here now. Capital asset stock prices are not the target of monetary stability, because it is only newly produced output that has impact on hiring and distortions on the labor market (your standard cyclical booms and busts). And it would be utterly wrong to try and stabilize financial asset prices as well as real output, as that would effectively be “central planning” the ratio of financial asset value to real value, the latter of which must be kept on a fixed path to avoid instability. And how could intermediate prices fluctuate when the final prices they are inputted into are stable?

    Don’t assume you know what is going to be a “malinvestment” and what isn’t. Interest rates are a misleading heuristic, and bad economists frequently ignore the whole time path of said rates, and the rational (enough) expectations of market participants thereof.

  10. Gravatar of Negation of Ideology Negation of Ideology
    16. February 2013 at 08:41

    “And I’d add that this whole discussion reminds me that even NGDP is really not optimal. I’ve always thought a nominal wage target was the theoretical ideal, albeit not politically feasible.”

    I’ve seen you say this before, and I’ve always been puzzled by it. It seems the goal should be to move away from a work based economy, more to something like your 100 million millionaires post.

    Imagine we had a society where the vast majority of people owned significant amounts of stock in corporations, and those corporations replaced workers with robots. Wages could decline while corporate profits and dividends increase. So the average person would get the majority of his income from dividends. Why would you want to stabilize wages then? If you stabilized NGDP per person, then every dollar in reduced wages would be offset by a dollar in increased dividends.

    The only problem is when you have almost all the stock owned by a few people, like now, but that is not a problem that monetary policy can solve.

  11. Gravatar of Saturos Saturos
    16. February 2013 at 08:59

    NoI, I don’t think that economy suffers our recessions. Inflation targeting would suffice.

  12. Gravatar of Ron Ronson Ron Ronson
    16. February 2013 at 09:28


    “And how could intermediate prices fluctuate when the final prices they are inputted into are stable?”

    Isn’t that what asset price bubbles are all about ? If firms start factoring in asset price increases into their profit calculations (and new firms start up with that as their business model) then targeting sales of final goods by expanding the money supply until the target is hit may indeed inflate bubbles of asset prices and debt.

  13. Gravatar of John Papola John Papola
    16. February 2013 at 09:55


    I don’t see how considering a broader measure of total nominal spending suddenly raises the central planning flag. I don’t what will or won’t be malinvestment. That only becomes clear when the sales price is below the cost of production. This question isn’t about looking at particular assets or classes. It’s about how we shall define total nominal spending, or MV. Asset bubbles (be them tulips, tech stocks or mcmansions) can be fed by excessively easy money, can they not?

    I thought the whole point of a nominal income targeting regime was to take into account changes in the demand for money rather than thinking purely about stability of the supply.

    So if I become worried about the future, I may hoard cash rather than buy a planned used house, used car, or a piece of art or a stock or bond. If NGDP doesn’t actually see these expenditures except as they pass through at some point to spending on newly produced goods and services, it seems to me like it may not be capturing the whole story on money demand at any given time.

    An excessive buildup of early-stage production whose output is intermediate goods could be missed by NGDP until it’s too late and the imbalances are revealed. George Selgin suggested this exact point. I don’t believe he’s into a central planning of asset prices either.

  14. Gravatar of Philo Philo
    16. February 2013 at 10:19

    “I’ve addressed revisions [in NGDP data] numerous times””it’s not a significant problem for NGDPLT.” Just to repeat: it’s not a problem because you propose that the monetary authority *target the forecast*, not the reality. Revisions in the measure of, say, *last year’s NGDP* are relevant to the monetary authority only insofar as they affect the market’s *present expectation* for *future NGDP*. The latter is the monetary authority’s *entire intrinsic focus*. Revisions in the measure of past NGDP belong in the same category with news about the weather or about new discoveries in natural resources or technology, or with irrational changes in “animal spirits,” etc. These are just factors that might affect what the monetary authority (intrinsically) interested in; they are of no intrinsic interest to it.

  15. Gravatar of Michael Michael
    16. February 2013 at 12:30

    “An excessive buildup of early-stage production whose output is intermediate goods could be missed by NGDP until it’s too late and the imbalances are revealed. George Selgin suggested this exact point. I don’t believe he’s into a central planning of asset prices either.”

    Doesn’t level targeting help here, though? A pilot trying to land an airplane doesn’t have perfect awareness of every gust of wind or turbulence that might shift his airplane off of course. He might even make a mistake that puts the plane above or below the glide path needed for landing. But this is not a problem because pilots do level targeting; when for whatever reason they deviate from the glide path, they correct course to return to it.

  16. Gravatar of Gene Callahan Gene Callahan
    16. February 2013 at 13:12

    Ha! I knew my wife’s efforts to stabilize my personality were pointless.

  17. Gravatar of Justin Irving Justin Irving
    16. February 2013 at 17:59

    @Negation of Ideology

    I would check out this old Sumner post and read the Mankiw paper linked there. That lays out the case for targeting wages.

    In the ‘rising capital share’ economy you foresee (and I agree) there will still be a place for at least some workers, so we could still target *average* wages and I think the logic would follow.

  18. Gravatar of Bill Woolsey Bill Woolsey
    16. February 2013 at 18:01

    John Papola:

    Intermediate goods are included in nominal GDP. They are counted as inventory investment.

    By the way, capital goods that last more than one year count as investment regardless of how they are used in the structure of production.

    A bulldozer used to produce a damn that will start producing electricity in 3 years and continue for 50 years counts as final output in the year it was produced, not when the electricity is enjoyed by a consumer in year 20.

    The error is to confuse final output, which includes capital goods, with goods of the lower order, which are consumer goods and services.

    Targeting the CPI, or consumption spending, would possibly miss malinvestment in “goods of the higher order.”

    And, of course, raw materials and partially finished goods, which don’t count as “fixed investment,” do count as inventory investment in GDP.

    No, we are down to “problems” with the prices of finanical assets and nonreproducable real assets. Nominal GDP targeting ignores those prices.

    Asset price bubbles are some notion that the prices of art or stocks are “too high.”

    Now, if high stock prices lead wealthier people to save less and purchase more consumer goods and services–nominal GDP is impacted. If high stock prices lead firms to issue new stock and purchase bars of copper, buldozers, or drill press machines, that raises nominal GDP.

    But if the price of stock goes up and people don’t spend on anything actually being produced with scarce resources, then nominal GDP is not impacted.

  19. Gravatar of Suvy Suvy
    16. February 2013 at 18:27

    “Stability is destabilizing.”

  20. Gravatar of Saturos Saturos
    16. February 2013 at 18:47

    John, you said,

    “excessively easy money”

    Please define that adequately without becoming a central planner. I know (suspect) you’re anti-EMH, but that’s an absurd claim to knowledge.

    Part of the point is that NGDP target fixes the aggregate nominal value of output, without attempting to legislate the relative prices between them, as money is diverted from one place to another. These changes don’t have harmful effects on employment. OTOH it would be wrong to take financial assets vs. real assets as a similar “relative price” which can be allowed to fluctuate whilst the joint value is held fixed; it’s the former that has to be fixed to maintain employment health, (workers don’t quit jobs making pizzas to “make” bonds) and picking any aggregate value would require a change in the ratio to be effected by moves in the nominal value of real output as well as financial assets, as the aggregate stayed fixed.

    Plus, it’s just absurd to attempt to “target” prices of financial paper like it were real goods. We care about the “real” velocity of money, not the “transactions” velocity on every single exchange (paying a kid to mow your lawn).

    “the whole point of a nominal income targeting regime was to take into account changes in the demand for money”

    But the reason why that’s important is because it affects the flow of medium-of-exchange funds faced by workers.

    Your last point is well answered by Bill.

    Ron Ronson, intermediate goods and financial assets: two different things.

    Gene, +1

  21. Gravatar of Saturos Saturos
    16. February 2013 at 18:50

    Roger Farmer, “Why financial markets are inefficient”

    Harold James, “Making the European Monetary Union”

  22. Gravatar of Saturos Saturos
    16. February 2013 at 18:53

    Claudio Borio wants to incorporate the “financial cycle” into macro:

    And Charles Calomiris on banking reform:

  23. Gravatar of Saturos Saturos
    16. February 2013 at 18:53

    Sorry, this is Harold James:

  24. Gravatar of Ron Ronson Ron Ronson
    17. February 2013 at 09:23


    On “Now, if high stock prices lead wealthier people to save less and purchase more consumer goods and services-nominal GDP is impacted. ”

    is it not a concern that at the zero-bound the most obvious way that monetary policy works is by this wealth effect ? The CB buys assets for new money which is deposited at banks but will not be lent out so the only way that monetary policy will be translated into additional GDP is if asset prices increase sufficiently that people will directly spend some of the revenue they get from asset sales.

  25. Gravatar of Negation of Ideology Negation of Ideology
    17. February 2013 at 14:34

    Justin Irving –

    Thanks for the link, it was very informative. The point Mankiw puts third

    “3.The more flexible a sector’s price, the less weight that sector’s price should receive in the stability price index.”

    is one of those wonderful counterintuitive notions in economics. Without putting much thought into it, I would have assumed you’d want to target more flexible prices because that would allow you to react more quickly, before sticky prices change. But Matt Rognlie explains the case for putting more weight on sticky prices:

    “From a stabilization perspective, monetary policy doesn’t matter for goods with flexible prices: if the prices are free to move around, they’ll adjust to their equilibrium values no matter what the Fed does.”

    Fascinating reading.

  26. Gravatar of TravisV TravisV
    17. February 2013 at 20:29

    Prof. Sumner,

    Yglesias says this below. If you were dictator, would you have a guaranteed basic income program?

    “A GBI helps people by giving them money, obviously. It also serves as a kind of de facto minimum wage, since if people can earn money doing nothing in practice you’re going to need to offer them higher pay to get them to work. But it’s much more flexible than a minimum wage. In a GBI world, an employer has to make work somehow appealing enough to get employees even though everyone’s guaranteed a basic minimum whether they work or not. But that “appealing” factor could be high wages, could be valuable skills and training, could just be a pleasant work atmosphere, or could be some combination of the two. Current minimum wage policies sort of try to achieve these goals by having exemptions for educationally rewarding internships or vocational programs. But these exemptions manage to be simultaneously too prone to abuse and too inflexible to capture the full range of possible scenarios that arise in human life.”

  27. Gravatar of Scott Sumner Scott Sumner
    18. February 2013 at 06:22

    Rien, You said;

    “I have no idea what kind of economics would work in the UK but there is not much supply side to be reformed left,”

    I once lived in the UK. Everything the UK government touches (health, education, local government, infrastructure, etc) is in need of massive reform. There are lots of supply-side opportunities. Plus tax reform.

    Marcus, Always got to keep one step ahead. 🙂

    Seriously, I will keep pushing for NGDPLT–I’m just trying to understand the British situation.

    Peter, Oddly, I think the government overstates housing inflation.

    Rademaker, The Fed is not monetizing significant amounts of debt, as most of the base increase is interest-bearing reserves.

    John, Yes, it ignores the prices of things that are not currently being produced with US labor, as it should. The goal is to reduce employment fluctuations.

    Negation, You said;

    “I’ve seen you say this before, and I’ve always been puzzled by it. It seems the goal should be to move away from a work based economy, more to something like your 100 million millionaires post.”

    See my response to John.

    Philo, It’s more complicated than that. Revisions could be a problem even with target the forecast (when you do level targeting), but I’ve proposed solutions. Here’s an example of where they could be a problem. The government revises NGDP 15% higher to include the underground economy. Do you then aim for negative 10% NGDP growth, going forward?

    Bill, Yes, intermediate goods are part of GDP.

    Saturos, Thanks for the links.

    TravisV, I’m basically opposed to that idea, although a very, very small one (say $1000 or $2000 per adult per year) might be acceptable. I prefer wage subsidies. I’d like to see the argument.

  28. Gravatar of TallDave TallDave
    18. February 2013 at 09:17

    Lately I’ve been wondering about deadweight costs of regulation that may look like inflation because they make prices go up but really aren’t because they aren’t monetary policy.

    For instance, after the Firestone thing in the 1990s cars were required to be built with TPMS, tire pressure monitoring systems. These things are basically worthless 99% of the time, because they only warn you about severe deflation which you can generally see with the naked eye. Plus, they tend to break down, and some states require you to fix them. But you still have to pay for them, like it or not. This makes a car more expensive, without making it better.

    I’ve been looking at CPI, they don’t seem to do a great job of distinguishing this kind of thing (in their defense, what they’re asked to do is of course practically impossible). I think this is one reason why today’s environment is more deflationary than CPI is telling us, leading to Fed policy that is too tight.

  29. Gravatar of John Papola John Papola
    18. February 2013 at 12:11

    “John, Yes, it ignores the prices of things that are not currently being produced with US labor, as it should. The goal is to reduce employment fluctuations.”

    Scott, I thought the goal of good monetary policy was primarily to make money as neutral as possible so that prices contain their maximum information content. Employment fluctuations due to sticky wages is a negative consequence of erratic monetary policy, but in reading your blog for years now, it’s never struck me that your goal with NGDP targeting was any particular level of employment. On the contrary, I recall reading explicit refutations of using monetary policy to target real variables.

  30. Gravatar of John Papola John Papola
    18. February 2013 at 12:36


    “Please define that adequately without becoming a central planner. I know (suspect) you’re anti-EMH, but that’s an absurd claim to knowledge.”

    You’re wrong here, actually. I think EMH is a very important modern insight, properly understood, rather than the strawman criticism made by the saltwater crowd which is akin to Keynes’ Say strawman.

    Markets aren’t at each and every moment “efficient”. I interpret EMH to essentially note that there’s no easy money. Of course SOMEONE is doing price discovery, going out on a limb that sometimes breaks. We can’t all own index funds.

    I am not a fan of “equilibrium” style analysis in general, that’s for sure. It’s a fiction. A model. But it’s shouldn’t be mistaken for reality. There is no equilibrium, only perpetual change and groping to find our way. So yes, I’m very “Austrian” in that way. But EMH is still pretty awesome.

    As to your points about target NGDP because that’s where the jobs are, which Sumner echoed, that makes sense to me. The reason I question that measure as a target is because it seems to me that cumulative imbalances of the sort we’ve seen in the housing market with its subsequent stress on the financial system seem to matter as well, including for workers. It seems possible that part of the reason why NGDP turned down when it did was because the degree of structural imbalances which perhaps made it harder for the Fed to keep up with the collapse in velocity. The wealth lost to bank balance sheets (and society as a whole) from the housing boom was real, not just nominal. I think it’s possible that NGDPLT targeting, which seems for some to suggest that everything was hunky dory in 2003-2007, misses part of the story.

    “But the reason why that’s important is because it affects the flow of medium-of-exchange funds faced by workers.”

    I think we should care about more than just nominal wages. We care about the allocation of resources too. Are we getting wealthier as a society or is there unusually concentrated degrees of mal-investment going on, making society poorer than it would be under a regime where money is more neutral.

  31. Gravatar of Rien Huizer Rien Huizer
    19. February 2013 at 00:58


    Point taken. about UK gvt efficiency I was mainly thinking about the UK not having mortgage interest deductibility, fairly efficient tax mix (low corporate, relatively low income (compared to combined burden state/fed in US and correcting for free healthcare and cheap education), high VAT, high petrol tax) and overall reasonably efficient institutions, compared to the US. UK health care is pretty good and cheap. I know of no country with a purely private structure that is better. Education pretty bad (I have a degree from a UK university) but also cheap and no longer virtually free. Defense expensive but much less than US.

    Of course in layman’s terms, UK’s “supply side” is slowly disappearing…

  32. Gravatar of ssumner ssumner
    19. February 2013 at 17:31

    Tall Dave, Isn’t it the opposite? If the technological improvements are not useful, inflation would be higher than the CPI showed.

    John, Yes, I should have said the goal is to reduce employment fluctuations due to sticky wages. Sometimes I get sloppy and take short cuts.

    Rien, Of course there is no country with a purely private health care system, so I can’t disagree with you there. Singapore is much cheaper, BTW. When I went to the doctor in London in 1986 the healthcare system was awful in terms of quality, but perhaps it’s improved since then. Certainly they waste less money then we do in America. Transport was pretty poor at that time as well.

    The British government spends nearly 50% of GDP–I’d much prefer the Canadian or Australian model. But I agree they do some things well, thanks to the Thatcher/Blair years.

  33. Gravatar of Rien Huizer Rien Huizer
    19. February 2013 at 23:01


    I agree the UK gvt sector is large. Maybe the scope is too large, maybe service provision inefficient, maybe they are boxed in by politics. But my question was what kind of economics. Clearly you want to make the gvt more productive, or get out of some forms of provision. But in comparison with the US: (1) USG provision is famously unproductive (2) if you would add the US health sector (at current cost levels and the US education sector “quasi public”) to State, Municipal + Federal spending you might get pretty high too. And no gvt has been able to make the UK give up these “freebies” . Likewise no one has been able to reduce the supplier-driven cost of health care education in the US (Although the internet may).

    So assuming the public and “quasi public” sectors in the UK and US are both expensive and unproductive and corrected for mission differences maybe equally so), the difference that I see is that the UK does not have the following inefficient US institutions: mortgage interest deduction, complete lack of pigovian taxes, excessive litigation, various dysfunctional regulatory bureaucracies (run for the benefit of the regulated). So I guess that the UK is ahead in supply side reform.

    As to Australia (remarkably low gvt share but based on an unsustainable and risky funding model): the scope and production structure of the public sector is similar to the UK (education, health care, public housing, etc). In fact the Oz public sector may have a wider scope and there is a much greater incidence of highly inefficient tax features (especially pension/superannuation taxation and a variety of levies and duties). Australia’s domestic economy is riddled by (inevitable) oligopolies that would have a much harder time in an EU country. So my guess (and the Oz Productivity Commission) is that there is a lot to be done in Oz.

    Australian monetary policy (and especially the expectations management by the ARB) is extremely interesting (a very good illustration of the zero multiplier BTW) bu not easily pigeonholed. The import/export price level (like in Singapore) plays an important role as well as the apparently reliable link between interest rates and residential construction in RBA communication. Currently both seem to be responding less well than in the past and maybe that will lead to changes, not in policy, but in narratives. The main problem is that the country is a price taker for a big part of its exports with a large structural external deficit so that the main variable is to manage the international cost of labor (like Singapore does) in order to attract/keep foreign investment. But where Singapore manages the labour market aggressively and in many ways, Australia ‘s is much more left alone and inefficient.

    All in all, the supply side is probably a lot more difficult to get right than the demand side (assuming Sumnerian policies in a suitable political/institutional environment)

  34. Gravatar of Scott Sumner Scott Sumner
    20. February 2013 at 08:42

    Rien, I agree the supply side is much harder to get right, I’d guess 1000 times harder. AD stabilization is really easy.

    Singapore is a good model of efficient government, and the UK is far from that sort of efficiency.

    If the UK government spends far more than the Aussie government, what do the Brits get for their money? I don’t see it, and I’ve lived in both countries.

  35. Gravatar of Peter N Peter N
    21. February 2013 at 10:24

    “Empirical estimates of fiscal multipliers are nothing more than estimates of central bank incompetence.”

    I assume you mean assuming the banks had been NGDP targeting.

    This doesn’t mean that given current economic conditions they don’t exist or that they haven’t existed in the past.

    “This means that “the” multiplier will depend on whether Bernanke had a bad nights sleep, or whether a member of the Board of Governors has a world class ability to be open-minded.”

    Regardless this is true, the conclusion doesn’t follow from the premise. This is Rhetoric, not logic. It at least requires assuming existing economic stability (like the presumed effect existing NGDP targeting) and an economy wide fiscal stimulus. It also seems to ignore the possibility of investments that have a significant economic return. The lack of a Federal balance sheet showing investment and depreciation tends to warp our thinking – GAAP for thee, but not for me.

    Furthermore, it seems to require the nonexistence of negative multipliers, since otherwise you could achieve a positive multiplier by preventing a negative one. The portion of the 2008 stimulus that went to the states would be an example of such a multiplier. This, of course, says nothing about a multiplier for the stimulus as a whole, so attacks at that level are irrelevant to this counterexample.

    “No mathematical model or empirical study can ever produce a reliable fiscal multiplier estimate.”

    I’m not sure whether you mean a usable prediction for a stimulus target or an after the fact estimate of effect, possibly limited to certain geographic areas or economic segments.

    This makes a difference, as does the question of how badly and in what way the economy is screwed up.

    Then there is the word “reliable”. Do you mean accurate within some error bound, or accurate enough to motivate policy.

    I think Spain and Greece would be examples of usefulness without accuracy. Sometimes if it hurts badly enough, part of the solution is to stop doing it, and the inability to have a local monetary policy has to be considered.

    Of course without certain structural reforms money will be squandered, but who said it was easy to separate practical economics from politics?

  36. Gravatar of ssumner ssumner
    22. February 2013 at 09:24

    Peter, You said;

    “I assume you mean assuming the banks had been NGDP targeting.”

    Not at all, This is equally true of inflaiton targeting, or the Taylor Rule, or flexible inflation targeting.

    You said;

    “This doesn’t mean that given current economic conditions they don’t exist or that they haven’t existed in the past.”

    Of course, I’ve repeatedly observed that fiscal stimulus might have a positive multiplier under the gold standard or Bretton Woods.

    Greece and Spain are horrible examples for fiscal stimulus. They are both broke. The eurozone is a near perfect example of where monetary stimulus trumps fiscal stimulus. They should do monetary stimulus, and if the ECB will not they should leave the eurozone. Fiscal stimulus is not even an option.

  37. Gravatar of TallDave TallDave
    24. February 2013 at 18:37

    Sorry for the late reply!

    Tall Dave, Isn’t it the opposite? If the technological improvements are not useful, inflation would be higher than the CPI showed.

    Hmmmm… let me try that out.

    Let’s say an apple costs a dollar. Tomorrow the government says all apples must be sold enclosed in an “apple box” which costs fifty cents but provides no value.

    Now the government thinks this box is wonderful so they make no adjustment to CPI. In reality, living standards have fallen at the same real income, which is… inflation.

    Yep, I had that backwards. The hidden improvements drive deflation, the hidden costs drive inflation.

  38. Gravatar of UK Labour Income & Unemployment | uneconomical UK Labour Income & Unemployment | uneconomical
    28. March 2013 at 00:00

    […] is a belated follow-up to Scott Sumner’s post last month on the puzzles in the UK macro […]

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