Right bias steering and right side deviations

If tight money is defined as below target NGDP, in what sense can below target NGDP be said to be “caused” by tight money? I’ll use an analogy to answer this question.

Imagine a ship crossing the ocean. The goal is to cross in a straight line, but the captain makes occasional mistakes and these result in a wavy path across the sea. Deviations from the straight line are called “right side deviations” and “left side deviations”. They are costly, resulting in excess fuel usage.

Steering mistakes that result in right side deviations are called “right bias steering”, and vice versa. Is there any other way to usefully define steering bias, other than by the evidence of path deviation? You can’t simply look at the steering wheel setting, because it may be turning right or left to offset wind and waves. This may not reflect steering errors.  In most cases, you can only spot biased steering by the results.

However, one can imagine a scenario where the force of waves is so powerful that even turning the steering wheel to the limit is not enough to stay on the desired path. The ship might be “trapped” away from the path by the enormous force of liquid waves pushing against it. Let’s call that situation a . . . oh I don’t know . . . how about a “liquidity trap”.

Now we have two possible causes of right path deviation. There might be right bias steering, and there might be a liquidity trap.

Now assume there are two schools of thought when it comes to steering ships. The pessimists worry that the force of waves may occasionally be so strong that the steering mechanism is unable to maintain the desired path. The pessimists argue that path deviations are caused by multiple forces, and that right side path deviations are especially likely to result from liquidity traps, because the strongest storms tend to push ships to the right.

The optimists believe that ships always have enough engine power for the captain to maintain a straight course if he does his job properly, setting the wheel at a position expected to keep the ship on the desired path. They believe that drunken captains occasionally use the “liquidity trap” theory as an excuse for incompetent steering. They scoff that the only liquidity problem is the liquid contained in the captain’s whiskey bottle.

The optimists believe that 100% of path deviations are caused by biased steering. Because there is no way to identify biased steering other than by observing path deviations, the optimists have become famous for equating biased steering with path deviations. Right side deviations aren’t just caused by right bias steering; they are effectively identical to right bias steering. Not because they are identical in a deep philosophical sense (one is a wheel setting and the other is a path), rather because as a practical matter one always implies the other.

This wasn’t true in the “Golden Age” of sailing, but it is today, especially given the widespread use of powerful modern ship engines built by the Italian firm Fiat, which are more that strong enough to offset any wind and waves.  Indeed some optimists seem to reject the laws of physics, claiming that Fiat engines have virtually infinite power, able to reach hyper-speeds.

The analogies could of course be taken much further.  Right bias steering tends to push a ship into dangerous waters, where liquidity traps are more likely.  This explains why the more competent captains are skeptical that liquidity traps even exist; they almost never see them.  Indeed one famous Australian captain never saw one during his entire 100-year career.

Here’s another analogy.  Pessimists tend to define steering bias in terms of whether the wheel is turned to the left or the right, not in terms of the setting of the wheel relative to what’s needed to keep the ship on course.

Here’s another.  Pessimists occasionally call for tug boats to nudge the ship back on course.  Optimists claim that tugboats are useless, as any competent captain will already be steering the ship back on course, and thus will “offset” the force of the tugboat.

PS.  I don’t know if this post was helpful.  For those who didn’t follow, the straight path across the water is stable NGDP growth, and right side deviation is falling NGDP.  (Left side is excessive NGDP.) Right bias steering is tight money (often associated with the political right), while left bias steering is easy money.

Optimists (i.e. market monetarists) define tight money as falling NGDP, and they also believe that falling NGDP is caused by tight money.  However, they understand that this definition only makes sense if monetary policy has infinite power to influence nominal aggregates.  And that’s only true with Fiat . . . I mean fiat money.

PPS. I suppose “port” and “starboard” deviations would be better, but I don’t want to confuse landlubbers like me.

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16 Responses to “Right bias steering and right side deviations”

1. Brian Donohue
11. February 2019 at 11:36

Very good. Aside from deluded Austrians, left-side bias hasn’t been a thing for almost 40 years.

William Jennings Bryan and debtors generally favor left-side bias. I lived through the ’70s and understand that left-side bias can be bad, but this danger hasn’t been on the radar since 1982.

Many businessman prefer right-side bias to protect against overtight labor markets and uppity employees. Bankers prefer right-side bias because they are creditors. All of this is presented under the heading of “sober inflation hawks”.

Whenever inflation hits 2%, though, the right-side bias crowd starts yammering. I don’t get it- a year of 3% inflation is less of a “miss” than, say, the 0.7% inflation we saw in 2015, but the clamoring is not symmetrical.

The net result is a detectable, if modest, right-side bias running through the Fed during the current economic recovery.

2. Carl
11. February 2019 at 13:43

I wonder if you can extend the analogy. I’m left wondering why anyone wants to turn to lower NGDP. Perhaps the right represents shallower water. It seems safer because there are smaller swells but it carries a risk of foundering.

3. Brian Donohue
11. February 2019 at 14:55

@Carl, yeah, I think it’s something like that. Left-side bias is hard to corral and can run away with itself, as we saw in the 1970s. And as anyone who lived through the period can tell you, it’s a hard habit to break.

But right-side bias can slam you into a wall. Both the Great Depression and Great Recession were products of right-side bias.

4. Mike S
11. February 2019 at 14:57

I like the narrative…I keyed in on two words from Powells last guidance…”Expectations” & “Narrative.” I guess he is reading the blogoshpere! Maybe expectations is the official narrative but its not reality. Both deviations look like a defined path but aren’t those just words because the actions tell a tale of everyone wants easy money with no consequences. Debts, Def Spending, liquidity traps, tightening are great buzzwords for a narrative to be conditioned into a certain dynamic state of some desired outcome toward wealth inflation only for the few! How will this tale end…no clue, its worth about \$2.75 / one subway token. What am I missing?

5. Doug M
11. February 2019 at 15:54

Navigational errors….

Sometimes the rudder is hard over, and you still can’t hold course.

Sometimes your desired course is straight into the wind. Under sail power, it is impossible to follow a direct course, you must tack back and forth.

Supposing you have plotted a course of 49 degrees to your destination. You realize you are right of course — 3 miles south, lets say. Is it better to:

1) hold course of 49 degrees which, will put you close to your destination, if not right where you want to be.

2) Take a course of 48.5 degrees, because that should get you need to be?

3) Take a course of 18 degrees for the next 6 miles. So, you can re-intercept your original course line?

Now, supposing there is a mark on your chart “here be dragons.” The “dragons” might be something like the zero lower bound. Do you attempt to steer around, or go through?

6. Benjamin Cole
11. February 2019 at 16:04

Ralph Kramden is driving his Fiat bus down 10th St. He has the power to create Fiat money… Well, sort of. He can create money but he has to give it to the banks. Ralphie boy cannot just throw money three an open window of the bus.

It turns out the banks of the power to create money too, called endogenous money supply.

But when real estate values are going south, the banks do not want to create money or lend on real estate.

Of course, real estate being a credit-dependent industry, this tends to become a self-fulfilling prophecy. And ouch– when property goes down it takes down our financial industry with it.

So what good does it do (in a property collapse recession) when Ralph Kramden puts money into a bank?

Would not we wish Ralph Kramdem to merely throw money out of the window?

7. Kenneth Duda
11. February 2019 at 18:03

> Whenever inflation hits 2%, though, the right-side
> bias crowd starts yammering.

It’s worse than that. They yammer whenever you turn the wheel to the left, even if inflation is below target. The WSJ editorial page screamed and hollered about out-of-control inflation being right around the corner in 2010, 2011, 2012, … and after being wrong over and over and over, did they ever apologize, and tell us what they learned?

-Ken

8. Mike S
12. February 2019 at 04:04

Now that Expectations and Narrative are the Fed’s concern…another great analogy from James H. Nolt: Bears are “bullish” on the value of money and debts they own. Bears typically want what is colloquially called “tight money,” but which is actually tight credit. Tight credit raises the value of money and debts and tends to undermine the value of most other things since bulls can no longer borrow to buy as much as they did during the boom.

Bears and bulls take “positions” (in capitalist lingo) reflecting their strategic intent. Popular media obscure the two-party nature of capitalism by anthropomorphizing “the market” (whether stocks, or whatever other market) as if the mind of the market were as singular as any individual. In fact, all asset markets are polarized between buyers and sellers. Insofar as these are acting as pure capitalists (not buying and selling for use, but as investments), most buyers are bulls and sellers are bears. So markets are never of one mind. They reflect opposing tendencies.

https://worldpolicy.org/2015/04/30/from-business-strategy-to-business-cycle/

9. Tim
12. February 2019 at 07:20

So the Golden Age is the Gold-backed money, and tug-boats are fiscal policy.

Who is the famous Australian captain who never saw a liquidity trap in 100 years?

10. rayward
12. February 2019 at 09:31

Sumner knows the joke about Australian economists, but Sumner has blogged that he doesn’t know any Austrian economists. Since Sumner holds the Ralph G. Hawtrey Chair of Monetary Policy at Mercatus, how can that be? The place is infested with Austrian economists. Here is the pests’ web page: https://www.mercatus.org/tags/austrian-economics During the financial crisis and great recession, Obama’s political adviser said “you never let a serious crisis go to waste”. What he meant is that it’s the right time to steer the boat left. When an Austrian says the same thing, what he means it’s the right time to steer the boat right, far right, across the shoal and into the rocks! Full speed ahead.

11. Jose
12. February 2019 at 11:00

Excelent post, actually, one of the best!

Defining the value of money as 1/NGDP makes a lot of sense, and even Austrians would profit from this definition. If only they realized that stable monetary base in face of strong productivity growth is a bias in favor of deflation, therefore, against their own principle that monetary policy should be ‘neutral’ and cause no impact in relative prices. If so called Austrians had given the necessary attention to NGDP targeting, they would realize the best policy (under their own rules) is NGDP targeting with nominal growth = productivity growth. This is the most neutral policy given the current technological conditions.

12. Matthias Goergens
12. February 2019 at 21:21

Scott, shouldn’t tight money be defined as less nGDP than the target says? Eg constant nGDP is fine, if that’s what people expect, but it’s actually tight, if the target is 4% growth?

13. dtoh
12. February 2019 at 21:46

When you set sail across the ocean for Boston and end up in New York, that’s a steering problem. When you set sail for Boston and then run the ship aground in Tierra del Fuego, that ain’t a steering issue. That’s problem of putting drunken sailors at the helm.

14. Justin
13. February 2019 at 11:59

Are people who don’t know their Port from their Starboard worth educating?

15. Benjamin Cole
15. February 2019 at 01:49

There may be practical or political limits to QE….

“THE head of Japan’s bank lobby on Thursday urged the Bank of Japan (BOJ) to review its 2 per cent inflation target and ultra-loose monetary policy, saying that sticking with its elusive inflation goal would do more harm than good.

Six years of heavy money printing by the central bank has made clear that Japan’s economy can recover even amid low inflation, said Koji Fujiwara, chairman of the Japanese Bankers Association.’

No bank profits—spreads are too thin…..

https://www.businesstimes.com.sg/banking-finance/head-of-japan-bank-lobby-urges-review-of-boj-policy-framework

16. Anyhony McNease
20. February 2019 at 08:51

As a former Naval Officer and ship driver I love this analogy. It works very well. To elaborate a bit on it today’s efficient and liquid markets along with high levels of data and information are akin to your super powerful engines that can overcome any bearing drift (this is the nautical term for your steering bias). You only need an engine powerful enough to overcome the combined forces of current (hull) and wind (sail area).

If there’s always enough power to avoid bearing drift then how to stop it? The first step is to detect the drift. In the open ocean it’s impossible to detect bearing drift with the naked eye. You have to have a plotted course and regularly check your position on that course. Once drift is detected you have to over correct the course to first get back on path then change the course to compensate for the external forces to stay on path. This analogy works so well with the economic and mentary dynamics you describe.

Is the path price level targeting? A NGDP target? Inflation target feels more like a course than a path.