Powell and I explain our policies to Joe Sixpack

WSLee recently commented as follows:

Scott, aside from the European issues on this post, last night Jerome Powell briefly denounced NGDP targeting at a Cato Institute virtual conference. https://www.cato.org/events/40th-annual-monetary-conference (at about 25:00 on the video)
According to him, NGDP targeting looks good as a model, but it is hard to implement and communicate it with the public. He also seems to believe that NGDP targeting may not be able to properly deal with changes in trend of growth. I guess you would disagree with him. Especially, on implementation and communications issues, you have repeatedly mentioned on those, but how would you rebut Powell about the argument that changes in growth trend cannot be appropriately managed with NGDP targeting?

To begin with, the Fed doesn’t need to explain its policy to the public, most of whom don’t even know what the Fed is. They need to explain their policy to the financial markets.

But let’s play this game just for the fun of it. A competition between me and Powell as to who can most easily explain their policy to the public. I’ll go first:

Joe Sixpack: OK Sumner, what’s your policy?

Me: The Fed puts new money into the economy, and also influences interest rates. I’ll have the Fed adjust policy with the goal of increasing the average American’s income at 3%/year over the long run. That’s just the average—some will get bigger raises and some will get smaller raises in any given year. But the average increase in incomes will be 3%/year.

Joe Sixpack: OK Powell, what’s your policy:

Powell: Simple! We are going to try to have the Fed achieve 2% inflation, on average.

Joe Sixpack: You mean you want the CPI to rise at 2%/year on average?

Powell: No, we target inflation using the Personal Consumption Expenditure price index.

Joe Sixpack: Never heard of it. So with the current high inflation, does that mean you plan to push inflation way below 2% going forward, so that it averages 2% over the long run?

Powell: No, technically we have flexible average inflation targeting. That means we don’t always offset high inflation with lower future inflation. Because of our dual mandate, we allow above normal inflation when it’s caused by supply shocks. Our main focus is demand shocks. We don’t care about the price of stuff like food and gasoline.

Joe Sixpack: But those are what I most care about!

Powell: Let me clarify that in the long run we do account for food and energy inflation, it’s just that in the short run we don’t try to offset them. In the short run, we focus on inflation caused by excess demand, not supply shortages.

Joe Sixpack: OK, but let’s say inflation is high because of demand shocks. Can I assume you’ll offset that high inflation with below 2% inflation going forward, so that inflation averages 2% in the long run?

Powell: Not quite. Technically, we have asymmetric flexible average inflation targeting. When inflation falls below the 2% target, we try to average it out with above 2% inflation going forward. But when inflation accidentally rises above 2%, even if due to excess demand, we don’t average it out with lower than 2% inflation going forward. Is that clear?

Joe Sixpack: I understand Sumner’s idea of having the average American get 3% raises each year. I’m not to sure about this asymmetric flexible average personal consumption expenditures price index inflation targeting system. Sort of seems like it allows you to do whatever the hell you want.

Normally I’d challenge Powell to a dual—put us both in a room and explain our views to 20 average people. But I’m not a good debater. So I’ll suggest that George Selgin advocate my position and Powell can also designate someone else if he prefers. Bring it on.

PS. My plan does deal with changes in growth due to variations in labor force growth. It does not account for changes in productivity growth, but that’s a feature, not a bug (and a minor consideration when considering the long run trends in inflation, which would be roughly 2%/year under my plan.)



34 Responses to “Powell and I explain our policies to Joe Sixpack”

  1. Gravatar of Kevin Erdmann Kevin Erdmann
    9. September 2022 at 11:26

    You’re giving the Fed’s current communications FAR too much credit. If you asked the average person on the street what current Fed policy is, they will likely say some version of, “They set the interest rates on loans really low so that Wall Street and reckless speculators will keep pumping up the prices of stocks and houses. It’s a house of cards that will eventually collapse, but they face too much pressure to avoid the recession that we need, so they keep kicking the can down the road.” And it’s basically what the average person would have said – and what I hear them say, whether it’s at a conference of registered financial advisors or chatting with a nephew on the phone – for years on end.

    Literally throwing feces at the wall would be better communications than what the Fed does now.

  2. Gravatar of foosion foosion
    9. September 2022 at 12:00

    @Scott, you might consider expanding your PS, since that seemed a large part of Powell’s objection.

    @Kevin, when I hear any comments on the Fed, what I hear is the simpler: they set rates too low and it hurts savers. What I used to hear is that they set rates too high and it hurts my mortgage or ability to buy a home. What I hear from the more sophisticated is that their goal is to hold down wages and labor power generally, to the benefit of the corporate elite. I doubt many people think about the Fed at all. Consider the sophistication of the average person regarding macro issues.

  3. Gravatar of Michael Sandifer Michael Sandifer
    9. September 2022 at 12:33

    You’re rarely more persuasive than when you make your case about the relative ease with which NGDP level targeting could be explained versus inflation targeting, and especially FAIT+ (The “+” sign indicates the Fed also considers employment.). “We want to keep (nominal) incomes on steady growth path.” That would sound good to people, I think.

    That said, the most common objection I hear to NGDP level targeting is that there’s a lack of indicators to facilitate it. That’s where my model for imputing the mean NGDP growth path in stock prices helps. No, it’s not as good as a properly liquid NGDP futures market, but it’s good enough.

  4. Gravatar of Market Fiscalist Market Fiscalist
    9. September 2022 at 15:51

    Questions on “I’ll have the Fed adjust policy with the goal of increasing the average American’s income at 3%/year over the long run”

    – Won’t this lead to the question as to whether you mean real 3% or nominal 3%?
    – Assuming it means real isn’t this making yourself a hostage to fortune that RGDP will average 3% over the long term?

  5. Gravatar of ssumner ssumner
    9. September 2022 at 16:27

    foosion, All of us NGDP advocates have covered that issue ad nauseam. If the NGDP opponents won’t even read our papers, what more can we do?

    Market, In this post I’m explaining the idea to average people. Most people assume you mean nominal income if you just say “income”. If a boss tells a factory worker they are getting a 3% raise, does the factory worker ask if that is real or nominal?

    When explaining the idea to financial markets I’d be much more specific.

  6. Gravatar of Market Fiscalist Market Fiscalist
    9. September 2022 at 16:45

    I’m possibly missing something obvious here: If the target is 5% NGDP growth won’t the average rise be nominal 5% ?

  7. Gravatar of ssumner ssumner
    9. September 2022 at 16:55

    No, I assumed a target of 3% growth in NGDP per capita. The idea was to keep the long run inflation rate at roughly 2%.

  8. Gravatar of Market Fiscalist Market Fiscalist
    9. September 2022 at 17:19

    OK, got it. Thanks

  9. Gravatar of marcus nunes marcus nunes
    9. September 2022 at 19:18

    Reminded me of a 12 year old post with Jack standing in for Joe sixpack!

  10. Gravatar of Matthias Matthias
    9. September 2022 at 23:55

    Scott, sounds like you are going with per-capits nominal wages level targeting for the explanation? That’s a better policy than ngdp level targeting too, and easier to explain.

  11. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    10. September 2022 at 05:32

    re: “my model for imputing the mean NGDP growth path in stock prices helps”

    Yes, that makes good sense. Market bottoms coincide with the bottom in short-term money flows. Tops are a little different and are largely overdone (providing a FED first strike).

  12. Gravatar of Kevin Erdmann Kevin Erdmann
    10. September 2022 at 07:58

    Here’s a quote from the lead analyst at “HousingWire.com” today. This sort of nonsense is ubiquitous, and I think we have to blame it on Fed communications. Really how could it be worse?

    “ Part of our housing dilemma is this: How can you make something affordable when you promote it as someone’s best investment? Since many people think of housing as a wealth creator — and we want more Americans to have more wealth — then the government needs to make sure demand stays high enough for that wealth product to grow.

    The entire system has to be designed to inflate the price over time. This is what we do in America. The housing market is very subsidized for demand to grow and whenever the economy gets weaker, rates fall and that impacts the housing market in a disproportionate way.

    When mortgage rates fall, the majority of homebuyers (including homeowners who need to sell to buy another home) are mostly employed, so lower rates greatly benefit them, and housing demand increases. ”

  13. Gravatar of ssumner ssumner
    10. September 2022 at 07:59

    Marcus, Good explanation.

    Matthias, No, I was explaining NGDP per capita targeting. Income includes much more than just wages.

  14. Gravatar of John S John S
    10. September 2022 at 08:51

    Marcus, very nice post. But “Champaign” should be “champagne,” unless Jack works at the Univ. of Illinois Urbana-Champaign.

  15. Gravatar of David S David S
    10. September 2022 at 12:01

    It’s actually very simple. As a red-blooded, hard working American I just want these simple things:
    -5% raise in my salary each year up until I retire, at which point I want Social Security to fully cover my living expenses.
    -A mortgage rate of 3%
    -Stable or declining prices for all the goods and services I purchase–especially gasoline for my pickup truck–that should never rise above $1.25 a gallon.

    What’s so hard for you economist types to grasp this?

  16. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    10. September 2022 at 12:03

    The “housing dilemma” is due to the Economists not knowing a debit from a credit, money from liquid assets, a bank from a nonbank.

    Every recession since WWII, with the exception of Covid, could be predicted and prevented.

    The FED’s Ph.Ds. don’t get it. Banks don’t lend deposits. Deposits are the result of lending. The only way to activate monetary savings (bank-held savings) is thru a nonbank, or the nonbank public. So, while the nonbanks are not in competition with the banks (savers never transfer their savings outside the banks unless they hoard currency or convert to another National currency), the banks can outbid the nonbanks for loan funds resulting in disintermediation (a term that only applies to the nonbanks since the Banking Act of 1933).

    The Sept. 2019 repo spike was the result of an interest rate inversion, where the remuneration rate was higher than nonbank short-term wholesale funding rates.

    The 1966 Interest Rate Adjustment Act is prima facie evidence.

  17. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    10. September 2022 at 12:28

    All monetary savings originate within the banking system. The source of saved deposits is demand deposits, directly or indirectly via the currency route (never more than a short-term seasonal situation), or thru the banks undivided profits accounts.

    Since time deposits (income held beyond the income period in which received), a component of M2, originate within the banking system (and there is a one-to-one relationship between time and demand deposits — an increase in TDs depletes DDs by an equivalent amount), there cannot be an “inflow” of time/savings deposits and the growth of time/savings deposits cannot, per se, increase the size of the banking system.

    From a system standpoint, TDs constitute an alteration of bank liabilities, their growth does not per se add to the “footings” of the consolidated balance sheet for the system.

  18. Gravatar of Michael Rulle Michael Rulle
    10. September 2022 at 12:39

    Yes, agree.

    One observation I have is how little people know about monetary policy. Not that I am some half expert, because I am not. But if an opinion writer in the WSJ writes something about Mar-a-lago, there will usually be about 5000 comments. Not that anyone knows anything, but they think the do.

    Read any essay on the Fed and you might get 50-100 comments and few are literate. Plus the essayist tends to be not much better.

    The point being is we don’t know anything about economics or monetary policy. It’s a topic where deductive logic is hard because we dont have any feel for the basic premises.

    So , while Powell has become almost a joke, and Joe SP might like your conclusions, they will never understand how you got there.

    We just don’t understand it.

  19. Gravatar of WSLee WSLee
    10. September 2022 at 17:01

    At least a good thing is that Powell is aware that Mercatus is the center of NGDP targeting advocates 🙂

  20. Gravatar of Brandon Berg Brandon Berg
    11. September 2022 at 02:50

    I don’t understand Powell’s second objection. Is he just saying that under NGDP targeting inflation rates will vary depending on real growth?

  21. Gravatar of Michael Rulle Michael Rulle
    11. September 2022 at 03:36

    A simple observation and question.

    You quite frequently make the point that “Banks don’t lend Deposits”. In fact that point is ubiquitous in your comments. I assume your point is deposits are created by lending, not vice versa. But you repeat it so often it makes the reader believe you think economists believe otherwise.

    Why do you keep repeating this comment? It almost seems bot like. Maybe I am missing something. But doesn’t everyone know that loans create deposits? Please explain why your comments almost always repeat this——-

  22. Gravatar of MIchael Rulle MIchael Rulle
    11. September 2022 at 03:43

    PS——my comment above is to Spencer Bradley Hall.

    PSS—-yes, it is my fault I have to keep correcting myself , but boy it would be much easier if TheMoneyIllusion had an edit function.

    Being able to edit makes it faster to write comments. I know there must be a reason Scott does not have that function——

  23. Gravatar of Todd Ramsey Todd Ramsey
    11. September 2022 at 05:33

    No mention of guardrails…surely Joe Sixpack can understand guardrails in this context?

  24. Gravatar of ssumner ssumner
    11. September 2022 at 07:53

    Brandon, You asked:

    “Is he just saying that under NGDP targeting inflation rates will vary depending on real growth?”

    Yes. (As if that’s a bad thing.)

  25. Gravatar of Spencer Spencer
    11. September 2022 at 08:07

    Yes, agree on the edit feature. Repeating is William Strunk’s idea.

    See the Fed’s propaganda in their own “Bible”: by R. Alton Gilbert (retired senior economist and V.P. at FRB-STL) – who wrote: “Requiem for Regulation Q: what it did and why it passed away”, 2/1986 Review.

    In his letter back to me on December 11, 1978 Gilbert wrote:

    “Such savings are invested in many ways, including deposits at commercial banks.”

    This is a universal error. Never are the commercial banks intermediaries (conduits between savers and borrowers) in the savings-investment process.

    Dr. Gilbert asked the wrong question. His implicit and false premise was that savings are a source of loan-funds to the banking system. Gilbert assumed that any potential primary deposit for the individual bank (actually derivative deposits, funds acquired from other DFIs within the system), were newfound funds to the banking system as a whole.

    Thereby in his analysis, Gilbert also assumes that every dollar placed with a non-bank deprives some commercial bank of a corresponding volume of loanable funds. But see Steve Keen.

    Whether the public saves or dis-saves, chooses to hold their savings in the commercial banks or to transfer them to non-banks will not per se, alter the total assets or liabilities of the commercial banks nor alter the forms of these assets and liabilities.

    Gilbert asked: Was the net interest income on loans/investments derived from “attracting” these savings deposits (viz., outbidding other member banks) greater than the interest attributable to the direct and indirect operating expenses of retail and this wholesale “funding”?

    I.e., Gilbert assumed the DFIs were intermediary financial institutions, which matched savings with investments. Never are the DFIs middlemen in the lending process for either depositors or stockholders.

    The confusion arises from a unique feature of the payment’s system; the whole (the forest) is not the sum of the parts (the trees) in the money creating process.

    The question is not whether net earnings on CD assets are greater than the cost of the CDs to the bank; the question is the effect on the total profitability of the commercial banking system. This is not a zero-sum game. One bank’s gain is less than the losses sustained by the other banks in the System.

    The only way to “activate” savings, put savings back to work, is for their owners, saver-holders, to: spend directly (e.g., purchase a car), or invest indirectly (e.g., invest in a mutual fund) – outside the payment’s system.

  26. Gravatar of Spencer Spencer
    11. September 2022 at 08:21

    Jerome Powell thinks banks are financial intermediaries:

    So does George Selgin: “None of this would matter if the Fed acted as an efficient savings-investment intermediary, as commercial banks are able to do, at least in principle.” And: “This is nonsense, Spencer. It amounts to saying that there is no such things as ‘financial intermediation,’ for what you claim never happens is precisely what that expression refers to.”

    “Yes, I hold that commercial banks are credit intermediaries and not just credit creators”

    From the standpoint of the entire payment’s system, from the standpoint of the economy, commercial banks never loan out, and can’t loan out, existing funds in any deposit classification (saved or otherwise), or the owner’s equity, or any liability item. Every time a DFI makes a loan to, or buys securities from, the non-bank public, it creates new money – demand deposits, somewhere in the payment’s system.

    Contrary to professional economists, banks are credit creators, not credit transmitters. The banks could continue to lend even if the nonbank public ceased to save altogether.

  27. Gravatar of Spencer Spencer
    11. September 2022 at 09:51

    Obviously, the demand for money increased.
    Households; Checkable Deposits and Currency; Asset, Level (BOGZ1FL193020005Q)

    But it is also obvious that the transactions velocity of DDs increased based on the distributed lag effect. I.e., inflation accelerated thereafter.

  28. Gravatar of Michael Sandifer Michael Sandifer
    11. September 2022 at 19:32

    There’s a striking symmetry between changes in Treasury yields and the mean expected NGDP growth rate my model imputes in changes in the S&P 500. There’s a graph that will appear on my blog early Monday morning that illustrates this. The correlation is -.83, obviously with an R^2 of .69 with an extremely low P-value.

  29. Gravatar of Jeff Jeff
    11. September 2022 at 21:26

    A common sense objection JSP might make would be to ask for proof that authorities even *can* “stabilize” any of the quantities they talk about targeting. Isn’t it possible that a large economic system is simply too complex to “stabilize” in such a fashion? Has it ever really been demonstrated in all of history, excepting brief interludes supported by fortuitous tailwinds? Potentially, with a lot of effort, you could perhaps stabilize one dimension, one specific quantity, but not without creating such large stresses in other dimensions that you risk ripping apart the entire machine (a la American flight 587: http://iasa.com.au/folders/Safety_Issues/RiskManagement/A300previous.html). Until this is proven it seems entirely reasonable to view all the talk of “stabilization” as mere sweet nothings whispered between fawning bureaucrats and ivory tower academics.

  30. Gravatar of Alex S. Alex S.
    12. September 2022 at 07:16

    I think the “communication” and “trend growth” issues are closely related:

    In the Keynesian world (in the policy world, this is the lens that both left- and right-leaning policymakers tend to think of the economy through—though they tend to differ on parameters such as effects of tax cuts) first comes RGDP, then PGDP (GDP price level), and then some afterthought called NGDP. You forecast actual and potential RGDP to get the output gap, and plug that into a Phillips Curve to forecast PGDP (inflation). Then, you combine your RGDP and PGDP forecasts to get NGDP that goes into an appendix, if even that. Thus, NGDP and any target applied to it, is intricately dependent on your RGDP and PGDP forecasts, making it difficult for Keynesians to see the relevance of NGDP.

    In the Keynesian world, the interest rate path that is communicated affects the output gap (RGDP against trend RGDP), which then affects inflation (PGDP). In other words, your instrument (interest rate target) comes ahead of your goals because it is your primary way of…wait for it…”communicating the stance of monetary policy.”

    This creates a lot of uncertainty about the one thing the Fed actually controls: the expected path of the level of NGDP. (Note: One way to remind the Keynesians that the central bank tries to set NGDP in the long-run is to ask: 1) can a central bank control inflation in the long-run? Yes, they will acknowledge. 2) Can it control the long-run trend rate of RGDP growth in the long-run? No, they will acknowledge. Then to get inflation to 2% in the long run the central bank ***must*** get nominal spending (NGDP or aggregate demand) to rise 2 pp faster than real production (RGDP or aggregate supply)). Such vagueness on central banks’ part breeds uncertainty since it is unclear what paths for NGDP the central bank will accept.

    Market monetarism is ***far*** more straightforward. First, is NGDP, then RGDP, and then PGDP—the ratio of money spent (NGDP) to produced goods and services (RGDP). If NGDP rises faster than RGDP you get inflation (PGDP).

    PS. Another angle on why the “communication” issue is just absurd: Powell says it works so well in the models yet the legions of economists who come from top-tier universities to work for the Fed cannot devise a way to explain NGDPLT to the public. Yet, I can find a 6-minute video on YouTube of Neil deGrasse Tyson explaining the theory or relatively. It’s very telling that the economics profession suffers from physics envy yet shudder to communicate good economic ideas to the public.

  31. Gravatar of ssumner ssumner
    12. September 2022 at 08:20

    Jeff, You said:

    “Isn’t it possible that a large economic system is simply too complex to “stabilize” in such a fashion?”

    Yes, if you were in fact trying to stabilize a “large economic system”. But that’s not what NGDP targeting does. It stabilizes the value of money. The value of the dollar was stabilized at $20.67/ounce for 54 straight years.

    But let’s say you are right about communication. Then I win the debate with Powell, as NGDP targeting is no worse than inflation targeting.

    Alex, Your comment nicely summarizes the crazy way that some Keynesians think about the monetary transmission process.

  32. Gravatar of Sara Sara
    13. September 2022 at 17:05

    First of all, it’s incredibly arrogant to refer to the public as “Joe sixpack” You are part of the general public, yet you don’t have a sixpack. I’ve seen you.

    There is nothing that separates you from the wisconsin factory worker, except for the fact that your policies lead to his unemployment. You are not more intelligent than the average farmer, nor do you live in a penthouse NYC apartment, because you or your father built an empire. You are an average guy, who is part of the general public. We all are. Get a grip with reality.

    Secondly, increasing nominal wages by 3% is meaningless. Nominal wages don’t matter. What matters is purchasing power. All of your policies lead to more debt, more inflation, and a Venezuelan economy.

    None of your policies would work in a competitive environment. The competition would destroy you. You are banking on the “belief” the “confidence” that people have in a never ending fiat scheme, a scheme in which the federal government has a monopoly, and in which you print and print and print, hoping that the bubble doesn’t burst, that the chickens don’t come home to roost.

    But I assure you that this will end. You cannot stop the decentralization of crypto unless you cut electricity. As Nigeria now understands, centralized blockchains and the tax gestapo will not stop it.

    In other words, it’s game over for the centralized apparatchiks like you.

  33. Gravatar of ssumner ssumner
    16. September 2022 at 23:22

    “There is nothing that separates you from the wisconsin factory worker”

    That was certainly true back when I was a Wisconsin factory worker!!

  34. Gravatar of msgkings msgkings
    19. September 2022 at 15:24

    Sara doesn’t know what “Joe Sixpack” is referring to

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