Short takes

1.  The National Review continues to edge in the direction of market monetarism.  Veronique de Rugy quotes me and then comments:

The whole thing is here. In my view, monetary policy in Europe, or in the U.S. for that matter, would increase the effectiveness of spending cuts and structural reforms (kind of like the water you drink to help the medicine go down). There may even be a good case that it would be useful independently of other reforms. But it is mistake to oversell it and it certainly won’t achieve our long term goals without serious reductions is government spending.

I completely agree.  NGDP targeting won’t even come close to addressing all the structural problems that hold Europe back.  BTW, lower spending is desirable, but the Nordic countries show that neoliberal reforms are even more important.

2.  Jon Hilsenrath of the WSJ discussed how the current recession discredited two views of inflation:

After the financial crisis erupted in 2008, two narratives about inflation dominated economic airwaves and financial-market worry lists.

One was that consumer prices would tumble in a replay of Depression-era deflation because the recession was so deep and unemployment so high. The other was that inflation would soar because the Federal Reserve responded so aggressively to the crisis by pumping trillions of dollars into the financial system.

It turns out that both sets of predictions were wrong.

Those are roughly the views of old-style Keynesianism and old-style monetarism.  He concludes as follows:

Minutes of the last two Fed meetings show Fed staff have been revising up their inflation forecasts because slack hasn’t been as great as they thought.

So inflation since mid-2008 has been the lowest since the mid-1950s, and the Fed staff was expecting even lower?  I.e. they set their policy levers in a position expected to produce even lower inflation than we’ve had, which ipso facto means lower NGDP growth (since monetary policy affects inflation from the demand-side.)

3.  A few weeks back James Hamilton replied to my criticism.  I agree with much of what he has to say, but would quibble slightly with one comment:

I suggested that the current policy, which I read as not allowing inflation to fall below 2%, works well for both objectives.

It seems to me that policy is closer to a ceiling of 2% inflation, even if you assume the Fed puts zero weight on jobs.  Inflation has averaged well under 2% since mid-2008, and at the most recent Fed meeting they declined to offer any additional stimulus, despite a forecast that inflation would average below 2% over the next few years.  That’s too tight even if they had a single mandate to control inflation, as the ultra-conservatives in Congress have proposed.

4.  Paul Krugman did a recent piece where he argued that the PIIGS need deep currency depreciation.  I think he’s right, but differ slightly in my reasoning.  One of Krugman’s arguments is:

Second, Munchau’s argument that Germany was badly overvalued in 1999. But it had a roughly balanced current account; I think it’s hard to make the case that it was a really big overvaluation.

I’m kind of shocked by this.  Krugman is a first rate international economist; he knows that the correct exchange rate is not the one that balances the current account.  Japan’s currency has been overvalued for 20 years, and yet they’ve run consistent CA surpluses.  Some might argue that the standard model doesn’t apply in liquidity traps.  I don’t agree, but the liquidity trap model has no applicability to Germany circa 1999.  The CA surplus reflects relative saving and investment propensities.  You decide whether a currency is under or overvalued by looking at whether aggregate demand is at an appropriate level.

5.  On a lighter note, here’s Krugman again, in a post entitled “None So Blind“:

Eddie Lazear has an op-ed in the WSJ on the fiscal cliff that, among other things, pooh-poohs any concerns that sudden cuts in spending might hurt the economy. He weasels a bit, but basically conveys the impression that there’s no evidence for Keynesian effects.

What this signifies to me is the politicization and corruption overtaking the economics profession. I’ll give Eddie the benefit of the doubt; he is probably just going by what his friends say.

And here’s Matt Yglesias:

Conventional wisdom in DC is that not only would the full expiration of the Bush tax cuts make people grumpy as they find themselves needing to pay more taxes, it would also provide the macroeconomy a job-killing dose of fiscal drag. The chart above from Goldman Sachs illustrates the idea clearly.

I don’t buy it.

The problem is that this chart ignores what I think we’re now going to call the Sumner Critique.

I hope Krugman also gives Matt the benefit of the doubt . . .

HT:  Tyler Cowen, dwb.


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75 Responses to “Short takes”

  1. Gravatar of Austin Austin
    22. May 2012 at 06:51

    Forgive me. I’m the little kid that comes in to a movie in the middle and asks what’s happening…

    What is the Sumner Critique? Do you not buy it either?

  2. Gravatar of Robert Robert
    22. May 2012 at 07:01

    Austin,

    I believe that the Sumner Critique is that we must take into account the reaction function of the central bank. It doesn’t make sense to talk about the effects of shocks to fiscal policy on aggregate demand without talking about how the central bank will be reacting to those shocks also. It seems that most economists like to talk about fiscal shocks as if the central bank were holding fixed the size of the monetary base, rather than targeting inflation (and hence offsetting fiscal shocks).

  3. Gravatar of Morgan Warstler Morgan Warstler
    22. May 2012 at 07:32

    Scott correctly argues that it is POSSIBLE for the Fed to print enough money that that it can keep NGDP running on level target.

    Scott also understand it is not LIKELY for the Fed to do this:

    1. to make tax increases go down easily.
    2. to make govt. spending increases go down easy.

    Scott also knows it is LIKELY to the Fed to to this:

    1. to make spending cuts feel successful.

    Tax cuts are good for gorwth, period.

    —–

    Matty wants those things that are POSSIBLE to happen.

    Scott would like this also.

    The VAST GAPING CHASM between Scott and Matty is this:

    Scott WILL ACCEPT what is likely (using QE only to cover cuts in Fiscal Spending).

    In fact Scott ADVOCATES THIS. This is the Cameron / de Rugy / Greenspan position as well.

    —-

    But Matty, who Scott is still “reeling in” will FREAK OUT if the Fed carries a bias in favor of spending cuts.

    IN FACT, Matty will also NOTY ACCEPT Sumners 4.5% NGDPLT when he sees it pushes us to shrink the govt.

    Scott is unwilling to educate folks by drawing hard lines in the sand.

    It’s weird.

  4. Gravatar of StatsGuy StatsGuy
    22. May 2012 at 07:33

    Good post format – you should do more like this, though your Dostoevsky style posts are fun too.

    The Sumner Critique (nice name) only applies to the extent that markets expect the monetary authority to fully compensate by targeting NGDP. If the Fed intends to compensate, but the markets don’t believe then we’ll see a dip, followed by a rear-view-mirror-looking Fed that compensates too late. Circa early 2009…

  5. Gravatar of Austin Austin
    22. May 2012 at 07:36

    Ah, gotcha thanks. Yes that makes sense and yes it seems we analyze fiscal and monetary policies in seperate vacuums.

    But what about the role of expectations? It seems fiscal policy is much more “front page” and thus would affect behavior much more than monetary policy, especially when interest rates have been near zero for years.

    As an aside, what is the status of the IS/LM curve these days? Discredited, useful academically but not practically, still valuable?

  6. Gravatar of Negation of Ideology Negation of Ideology
    22. May 2012 at 07:36

    I discovered this blog via the National Review, I believe it was one of Ramesh Ponnuru’s columns.

    By the way, congratulations on making the National Affairs new book. Is your chapter a reprint of your National Affairs article, or is it new?

    http://www.amazon.com/Time-Governing-Solutions-National-Affairs/dp/1594036578/

    Austin – The linked column defines the Sumner critique as “The problem is that this chart ignores what I think we’re now going to call the Sumner Critique. In other words, it assumes that the Federal Reserve is somehow going to fail to react to any of this.”

    Of course, this argument doesn’t originate with Scott Sumner. But what the Sumner plan does is make the Fed’s reaction automatic, so I think it’s an appropriate name.

  7. Gravatar of ssumner ssumner
    22. May 2012 at 07:49

    Austin, The other commenters provided some useful background.

    Don’t worry about the front page, the people who matter (market participants) pay lots of attention to the Fed. Rumors of QE2 had a dramatic impact on asset prices.

    I don’t care for IS/LM. Nick Rowe’s stuff is what you should read–he claims the IS curve slopes upward

    Statsguy, Thanks for the Dostoevsky comparison.

    Negation, It’s the same article.

  8. Gravatar of Robert Robert
    22. May 2012 at 07:51

    Austin,

    Personally I only see IS-LM as being useful for introducing the concept of general equilibrium to undergrads, though for some reason some economists (notably, Paul Krugman) seem to like it. One of the bigger (of many) shortcomings can be reduce by “expectations-augmenting” it. Bill Woolsey has a very good post explaining market monetarism in an expectations-augmented IS-LM framework if you’re interested:

    http://monetaryfreedom-billwoolsey.blogspot.com.au/2012/05/negative-real-interest-rates.html

  9. Gravatar of Kevin Donoghue Kevin Donoghue
    22. May 2012 at 07:58

    Scott,
    Re Krugman: German unemployment was falling in 1999, so it’s not likely that the “roughly balanced” current a/c was due to weak AD. I’ll be surprised if anyone can knock a hole in his argument there.

    If you want to see something shocking, here’s a recent tweet from Robert Peston of the BBC:

    “If you save in final salary pension scheme or building soc account, be v scared that IMF wants Bank of England to cut rate from 0.5% to 0.0%”

    I threatened to set you on him. Hopefully that’ll make him think.

  10. Gravatar of Greg Ransom Greg Ransom
    22. May 2012 at 08:27

    “You decide whether a currency is under or overvalued by looking at whether aggregate demand is at an appropriate level.”

    How do you look and “see” whether “aggregate demand is at an appropriate level”, how do you decide what the appropriate level of aggregate demand is and going forward, how do you know what is “appropriate”, how do you decide on that.

    How do you solve the “knowledge problem”. What’s the trick.

  11. Gravatar of dwb dwb
    22. May 2012 at 10:39

    I am glad commentators like Veronique de Rugy are finally coming around to the idea of unshackling the Fed to help fiscal conservatism.

  12. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    22. May 2012 at 11:02

    This podcast from Oct 2011 discusses NGDP targeting, mostly favorably;

    http://media.bloomberg.com/bb/avfile/Economics/On_Economy/vdNNEEaa4sGc.mp3

    Goodfriend does a nice job early on laying out the dangers that lurk. At about 18 minutes Columbia’s Charlie Calomiris (always entertaining) begins his endorsement, with caveats.

    Unfortunately, Scott isn’t mentioned.

  13. Gravatar of Jason Jason
    22. May 2012 at 13:03

    On number 5 …

    Lazear writes:

    “The evidence suggests that we should fear the tax hikes, but not necessarily the spending cuts.”

    and

    “There is more ambiguity now about the choice between monetary and fiscal policy, in large part because with interest rates near zero, the effectiveness of monetary policy is thought to be more limited.”

    Lazear is not be making the Sumner critique argument Yglesias is making: if monetary policy is dominant the Fed should offset spending cuts and tax increases. He actually admits the lack of traction of monetary policy based on Krugman’s argument.

    Ostensibly, Krugman believes the Sumner critique except at the zero lower bound. I believe he is emphatic to the point where he actually says he believed the Sumner critique even more until he looked at Japan and came up with his zero lower bound argument.

    Therefore, Krugman doesn’t have to criticize Yglesias: they are talking different models (fiscal @ ZLB versus fully monetary). But Krugman can criticize Lazear since he’s not making a monetary argument.

  14. Gravatar of Robert Robert
    22. May 2012 at 14:05

    Jason,

    I don’t think their models are different at all. I haven’t read Krugman’s liquidity trap paper in a while, but I recall his argument going something like this:

    Monetary expansion at the ZLB is inherently a problem of credibility. Increases in the monetary base at the ZLB can absolutely increase real output [i]but only if[/i] they’re expected to be permanent. That is, if they raise the long run price level (market monetarists would change the argument slightly to be about the NGDP level). The issue is, the central bank faces a time-inconsistency problem. The central bank has the incentive to allow real output to rise and then shrink the monetary base, avoiding inflation. If people expect the central bank to do this, increases in the monetary base will simply be offset by increases in the demand for money.

    So Krugman acknowledges that monetary policy works at the ZLB, just that the central bank has to credibly promise to be ‘irresponsible’ after we exit the ZLB.

    Maybe that credibility issue applies to the current situation – I don’t think it does. The central bank should be forward looking enough to realise “Hey, we’ll probably need this tool again in the future. Better not blow our credibility”. Either way, change to a level targeting framework and it’s not an issue anymore – but does it apply to fiscal shocks?

    Monetary expansion to offset a fiscal shock is [i]not[/i] a promise to be ‘irresponsible’ and allow more inflation in the future than the central bank would like. It’s a promise to keep inflation running at the 2% target, which is completely credible. Now if government spending secretly fell and inflation unexpectedly collapsed, then there’d be issues with making it up. But since fiscal policy changes will be announced long before hand, the Fed has ample time to announce it’s credible intentions and react to any changes in inflation expectations.

  15. Gravatar of Robert Robert
    22. May 2012 at 14:06

    And it seems the [i][/i] tags don’t give me italics. How embarrassing…

  16. Gravatar of johnleemk johnleemk
    22. May 2012 at 15:50

    Robert, you can use HTML instead.

    I find Krugman’s use of the ZLB/liquidity trap concepts quite annoying, not because I take issue with the concepts themselves, but with the terminology. Krugman’s notion of the ZLB and liquidity trap recall the old Keynesian connotations of these terms, which are that the central bank is impotent when rates hit zero, and fiscal policy is the only way to address the AD shock — when as Krugman himself proclaims, all the ZLB means is that the central bank needs to take unconventional policy measures, and monetary policy in general is otherwise as effective as ever.

    The only thing militating against unconventional monetary policy is that it is unconventional — but if one thinks about it, what is so meaningful about the distinction between monetary policies that target the interest rate versus monetary policies that do not? Sure, one’s conventional by pre-2008 conventions and the other is not. Does that ipso facto make unconventional monetary policy empirically unworkable or theoretically less sound?

    I’ve argued with otherwise economically literate people before who have literally said “Fiscal policy is the mechanism we should prioritise now, but unconventional monetary policy would be effective too.” I don’t understand this thinking. It’s completely insensible.

    Even if you believe fiscal policy can be effective (I’m undecided but in any case consider this question almost entirely academic, literally), it’s far easier to get US monetary policy changed by convincing 9 people than it is to get US fiscal policy changed by convincing >500 people. The left’s blind focus on fiscal policy is delusional, and I attribute a good deal of it to confusion caused by how Krugman has used the terms ZLB and liquidity trap.

  17. Gravatar of Robert Robert
    22. May 2012 at 16:47

    Johnleemk,

    Thanks for the tip.

    The strange thing I find about Krugman is that I agree with all his premises but not his conclusions. He has concerns about credibility and time-consistency, and so prefers fiscal policy because it doesn’t need credibility to have effects now. But he’s also come out in favour of NGDP targeting. As you point out, the monetary solution is the path of least resistance. If you are going to get >500 people to agree on something, then make it so that they only have to agree once rather than every time there’s a recession. Have an explicit level target amended to the Federal Reserve Act (with consequences for not meeting the target in the given time frame). Credibility issue solved.

  18. Gravatar of ssumner ssumner
    22. May 2012 at 18:03

    Kevin, I think you misunderstood my comment on Germany. I have no opinion on whether the currency was overvalued. There’s certainly a widespread perception that Germany had to work hard to bring it’s labor costs down, so that it could reduce its unemployment rate from double digit levels. But maybe that’s all wrong. My point was the CA tells us nothing about whether a exchange rate is overvalued or not. Krugman shouldn’t have even mentioned the CA.

    “Never reason from a CA balance.”

    Thanks for the tip on the British savers. I wonder if they realize how much they’ll have to pay in taxes because of the huge debts being run up at a time when monetary policy could achieve the same stimulus at zero cost to the government?

    Greg, You asked:

    “How do you look and “see” whether “aggregate demand is at an appropriate level”, how do you decide what the appropriate level of aggregate demand is and going forward, how do you know what is “appropriate”, how do you decide on that.

    How do you solve the “knowledge problem”. What’s the trick.”

    Hayek could answer that. You set an NGDP target. If you are above target the currency is too weak, and if you are below target the currency is too strong.

    Thanks Patrick, I’ll take a look.

    Jason, I think that’s a stretch. Perhaps Lazear is a supply-sider. I very much doubt that Krugman would agree with Yglesias, but of course I’d be thrilled if he did.

    Robert, I agree with much of what you say, but not this:

    “The strange thing I find about Krugman is that I agree with all his premises but not his conclusions. He has concerns about credibility and time-consistency, and so prefers fiscal policy because it doesn’t need credibility to have effects now.”

    That may be Krugman’s view, but it seems wrong to me. Woodford showed that what matters isn’t the current setting of fiscal policy, but rather the future expected path of policy. This is an extension of Ricardian equivalence, which already made that argument for tax cuts.

  19. Gravatar of Morgan Warstler Morgan Warstler
    22. May 2012 at 20:58

    Poll:

    Does everyone agree that higher NGDPLT say 7% vs. a lower one say 3% basically means accepting more inflation?

    —–

    Is anyone holding out some weird mental thing where higher NGDPLT means that RGDP is maximized above say 4.5%?

    And can you make that argument without saying it s a good thing for the government to direct money, make investments etc?

  20. Gravatar of Greg Ransom Greg Ransom
    22. May 2012 at 21:52

    So … if you haven’t set an NGPD, they you _can’t_ determine whether or not aggregate demand it at an appropriate level.

    Taking you seriously, that’s what you’ve just said.

    Me: “”How do you look and “see” whether “aggregate demand is at an appropriate level”, how do you decide what the appropriate level of aggregate demand is and going forward, how do you know what is “appropriate”, how do you decide on that.

    How do you solve the “knowledge problem”. What’s the trick.”

    You: “Hayek could answer that. You set an NGDP target. If you are above target the currency is too weak, and if you are below target the currency is too strong.”

  21. Gravatar of Lorenzo from Oz Lorenzo from Oz
    22. May 2012 at 23:11

    Patrick S: A Daoist proverb to the effect that there is no limit to what you can achieve if you do not insist on taking the credit comes to mind 🙂

  22. Gravatar of Paul Andrews Paul Andrews
    23. May 2012 at 00:03

    Scott,

    “the people who matter (market participants) pay lots of attention to the Fed. Rumors of QE2 had a dramatic impact on asset prices”

    This contradicts your previous statements that Fed asset purchases are made at market prices.

  23. Gravatar of ChargerCarl ChargerCarl
    23. May 2012 at 00:53

    Morgan you said:

    “Does everyone agree that higher NGDPLT say 7% vs. a lower one say 3% basically means accepting more inflation?”

    Isn’t one of the pro’s of NGDPLT that we let the market determine whether or not it’s transmitted as increasing RGDP or inflation? I guess the answer would be, yes, 7% would probably mean accepting higher inflation, but it also might not.

  24. Gravatar of Bill Woolsey Bill Woolsey
    23. May 2012 at 04:29

    Charger Carl:

    There is no doubt that 7% would imply more trend inflation than 3%.

    I find it hard to imagine that the 7% target wouldn’t have more inflation at each and every date.

    The point of NGDPLT is that exactly how much that inflation would be in either case, and what level it would have at each particular future date are not determined at all by the rule.

    You join the Market Monetarist club when you see that as a feature, not a bug.

  25. Gravatar of ssumner ssumner
    23. May 2012 at 05:15

    Greg, You said;

    “So … if you haven’t set an NGPD, they you _can’t_ determine whether or not aggregate demand it at an appropriate level.

    Taking you seriously, that’s what you’ve just said.”

    No, that’s misquoting me. Obviously the Fed has not adopted Hayek’s suggestion, I was simply providing an example. It’s my recommendation that they should target NGDP. I judge policy based on what I think would be an appropriate policy target. The Fed disagrees with me, and hence it judges the appropriate stance of policy differently. That’s why I disagree with the Fed.

    I don’t doubt that you have ideas as to what sort of Fed policy is appropriate, given the Fed exists. I imagine that would exclude a 100 trillion percent increase in the money supply. A little introspection on your part might allow you to answer the question.

    Paul, You said;

    “This contradicts your previous statements that Fed asset purchases are made at market prices.”

    This is wrong for two reasons. Asset prices move on changes in expected future policy, not the actual purchases. And second, the asset prices that were affected by QE2 were not the same as the assets that the Fed purchased.

    BTW, any American is free to buy the asset class that the Fed is purchasing, if you think the holders of those assets are benefiting from monetary policy.

  26. Gravatar of Morgan Warstler Morgan Warstler
    23. May 2012 at 07:19

    Scott would it kill you to answer the poll?

    Bill thanx!

    —–

    Since we know 7% NGDPLT = more inflation.

    3% is Woolsey’s number – and a great number indeed.

    My question is, what keeps the NGDPLT % from changing on political winds?

    If it can change, then expectations are out the door.

    This is my real and VERY TRICKY point: ULTIMATELY the # comes down to FORCE.

    It is better to have a lower # to start (less inflation), that keeps the power in the hands of the hegemony (the savers), so that they can maintain the political will to KEEP THE NGDPLT the same.

    Basically, to ensure the tranquility of a true LT that goes on and on and on, we ahve to keep Dems from having any say over the #.

    Don’t we WANT the NGDPLT number to be low enough that the mob can’t touch it?

    ——

    Said another way, Scott why are you so afraid of revolucion!

  27. Gravatar of Major_Freedom Major_Freedom
    23. May 2012 at 07:31

    ssumner:

    Obviously the Fed has not adopted Hayek’s suggestion,

    Why are you still spreading this myth? I thought we learned he was against NGDP targeting. Hayek’s suggestion, in black and white, was to AVOID aggregate spending targeting. It said to do so would be “very harmful.” He also said it would generate “instability” in the international market:

    “Here my aim has merely been to show that whatever our views about the desirable behavior of the total quantity of money, they can never legitimately be applied to the situation of a single country which is part of an international economic system, and that any attempt to do so is likely in the long run and for the world as a whole to be an additional source of instability.”

    Why do you continue to brainwash your impressionable readers? Your call for the US to engage in NGDP targeting would, according to Hayek, generate instability in the long run.

    Hayek’s actual position was to have monetary competition, which is NOT an advocacy of NGDP targeting.

  28. Gravatar of Major_Freedom Major_Freedom
    23. May 2012 at 07:45

    ssumner:

    BTW, any American is free to buy the asset class that the Fed is purchasing, if you think the holders of those assets are benefiting from monetary policy.

    You’re missing the point. When the fed buys assets from the primary dealers, they are not buying them from everyone else. The primary dealers are the initial receivers of the money. This cannot be eliminated by others buying the same class of assets, hoping that the primary dealers will then buy them, for the introduction of new money into the economy, into the primary dealer’s bank accounts, is already past and settled.

    Everyone else has to increase the prices of those assets the Fed buys by reducing their expenditures elsewhere. The primary dealers don’t. They are SELLING assets and NOT reducing their expenditures elsewhere when the market value of those assets goes up because of what the Fed is doing.

    This is wrong for two reasons. Asset prices move on changes in expected future policy, not the actual purchases.

    You have the causality backwards. The actual purchases are what grounds the expectations of purchases. If the expectations turn out wrong in relation to actual purchases, then the prices will tend to go back in line with actual purchases once again.

    If the price of the asset increases on expectations, because it is a price movement not based on inflation of money, it will require a reduction in spending elsewhere, which reduces the ability of those buyers to buy other assets.

    When the Fed buys assets from the primary dealers, and hence the market prices of those assets rise, everyone who pays more for those assets has to pay less for everything else, while the primary dealers do not. The primary dealers are RECEIVING the inflation money first, and so they can increase their demand for assets without reducing their spending on everything else.

  29. Gravatar of Peter N Peter N
    23. May 2012 at 08:49

    @Major Freedom

    You’re invoking what George Soros has called reflexivity. Expectations influence actions and actions influence expectations.

    I would add to this Keyne’s (beauty contest) view that expectations influence expectations. You make investment decisions based on your expectation of what other’s expectations are. For the most part, they haven’t acted yet, so that’s what you have to work with.

    And people are reluctant to immediately change their expectations when given new evidence (unless they are professional poker players, where the skill is absolutely necessary).

  30. Gravatar of david david
    23. May 2012 at 10:51

    It turns out that Scott Sumner once used a time-machine to travel back to 2000 and masquerade as Milton Friedman.

  31. Gravatar of Robert Robert
    23. May 2012 at 11:52

    Major_Freedom,

    Hayek says as much in a 1975 American Enterprise Institution talk:

    http://hayekcenter.org/?p=5047

    And Larry White seems to think so too:

    http://hayekcenter.org/?p=5050

    First, go back and read Prices and Production again but be sure to recognise that when Hayek talks about the “total money stream” he’s talking about NGDP. It’s very clear that he think the optimal monetary policy is one which maintains a constant NGDP.

    Second, take the time to read The Theory of Free Banking, by George Selgin. You’ll find that an immediate result of competitive note issue is… dun dun dun: stable NGDP.

    Third, recognise that people are able to have contingency policies. My first preference is for competitive note issue. But contingent on the fact that note issue is monopolised by a central bank, the next best alternative is an NGDP level target. So Hayek saying he favours an NGDP target doesn’t actually contradict his views expressed in Prices and Production; and just because Scott is pushing for NGDP targeting as a central bank policy, doesn’t mean he isn’t receptive to (or maybe even prefers) competitive note issue.

    Let’s find some common ground and work our way up. An obvious starting point would be: do we agree that monetary equilibrium results in stable nominal income?

  32. Gravatar of dwb dwb
    23. May 2012 at 12:03

    will the real F Hayek please stand up?

  33. Gravatar of CA CA
    23. May 2012 at 12:20

    David, thanks for posting that link. Absolutely great stuff. If only Uncle Milton were still alive…

  34. Gravatar of Major_Freedom Major_Freedom
    23. May 2012 at 13:05

    Peter N:

    You’re invoking what George Soros has called reflexivity. Expectations influence actions and actions influence expectations.

    Reflexivity is derived from the philosophy that rejects rationalism, and thus individual action as the primary, as well as the efficacy of the price system to stabilize markets in the long run. It cannot explain why prices go up during the boom, then suddenly fall during a bust. It just takes it for granted. It is an infinitely contingent chain of freely floating abstractions. As Aristotle pointed out, there is no foundation for the knowledge of any link in the chain, if all the links are contingent on other chains. I would have to believe that all expectations and all actions are groundless and have no grounding in the real world, such that I am just a wandering empty shell that is at root a product of his surroundings.

    It’s just neoMarxism redux. It too claimed that individual thought was necessarily determined in part by “social conditions”, the “productive relations”, and so on.

    Robert:

    Do you have anything by Hayek in writing? I am not saying Hayek never said any of this, but one of my personal methods is to only go by either first person written word, or first person video/audio clip. I’ve been burned a few times in trusting second and third hand hearsay. Plus, in many cases short quotes like this are easily taken out of context, for example White taking Hayek out of context in his paper “Did Hayek and Robbins Deepen the Great Depression?” when he quoted Hayek as writing:

    “Whether we think that the ideal would be a more or less constant volume of the monetary circulation, or whether we think that this volume should gradually increase at a fairly constant rate as productivity increases, the problem of how to prevent the credit structure in any country from running away in either direction remains the same.”

    Which he interprets as Hayek being a “strong” supporter of NGDP targeting. But Hayek was referring to other people’s views about “ideal” monetary policy. White doesn’t include the rest of the passage, where in the very next paragraphs Hayek writes about his own ideas:

    “Here my aim has merely been to show that whatever our views about the desirable behavior of the total quantity of money, they can never legitimately be applied to the situation of a single country which is part of an international economic system, and that any attempt to do so is likely in the long run and for the world as a whole to be an additional source of instability. This means of course that a really rational monetary policy could be carried out only by an international monetary authority, or at any rate by the closest cooperation of the national authorities and with the common aim of making the circulation of each country behave as nearly as possible as if it were part of an intelligently regulated international system.

    “But I think it also means that so long as an effective international monetary authority remains a utopian dream, any mechanical principle (such as the gold standard) which at least secures some conformity of monetary changes in the national area to what would happen under a truly international monetary system is far preferable to numerous independent and independently regulated national currencies.

    Hayek was clear. GIVEN central banks exist, he wants them to operate in a fashion AS IF there is a global monetary authority that targets NGDP, which of course means now, in 2012, he would be AGAINST individual countries attempting to target aggregate spending if world market conditions change such that spending in one country is accompanied by a rise in spending in other countries. He was say then that US based NGDP targeting NO MATTER WHAT, can lead to international instability if aggregate spending in the US falls as a result of investors and dollar holders taking their money out of the US, to be invested and spent elsewhere in the world.

    Thus, if during “normal times” in the US, where nominal spending would otherwise fall because money is taken out of the US and spent elsewhere, which by the way is exactly the same logic that market monetarists apply WITHIN optimal currency zones, in that they say if spending drops in one city, it would be destabilizing to print money to bail that city out no matter what.

    Well, this logic Hayek applied to the world economy. He believed that if spending falls in one country, just like it could fall in one city, or one firm even, then it is destructive to use monetary policy to prevent spending from falling in that localized area. Spending in the US then, according to Hayek, should rise and fall in accordance with the fall in rise in resulting spending elsewhere in the world, exactly like it would happen with worldwide NGDP targeting from a global central bank. But barring that “utopia”, Hayek said a gold standard is preferable, because at least it would enable country level aggregate demand to rise in fall in accordance with world market conditions.

    Market monetarists are falsely using Hayek as a face to justify their own worldview. Hayek would NOT be a supporter of Bernanke targeting US NGDP at 5% come hell or high water, no matter if spending falls in the US because international investors invest more elsewhere, no matter if spending rises in the US because international investors invest less elsewhere.

    When Hayek was talking about “rational” monetary policy leading to no drop in “incomes”, he was referring to the Utopian world central bank perspective, NOT to an individual country’s spending. At least this is the case in Hayek’s actual WRITINGS, which I am going by.

    If you have another writing from Hayek that contradicts this, then I will concede that Hayek favored the thing that market monetarists are calling for, but then it wouldn’t make my judgment of Hayek any better, because he would have again contradicted himself.

    So I invite you Robert to show me something in writing that shows Hayek said the opposite of what he wrote above which I quoted IN CONTEXT.

  35. Gravatar of orionorbit orionorbit
    23. May 2012 at 14:15

    Scott, I disagree about the Germany/Japan FX rate thing (though you are right about the CA not being required to clear the imports market). If we accept that JPY is overvalued because NGDP is too low, then the BoJ could buy enough dollars to bring the JPY value at whatever value you think would be fair, but even if the BoJ committed to always buy sufficient USD to keep JPY at fair value, NGDP would not recover, because investors would simply shift their portfolios to JPY assets (rather than boost NGDP), unless the policy was accompanied by a commitment to a higher inflation target. Krugman has shown this very convincingly in his article about Japan’s liquidity trap.

    It is too low inflation that causes a depressed NGDP AND an overvalued JPY, it is NOT the case that too low NGDP causes an overvalued JPY. If NGDP got back to trend because of a huge positive supply side shock, japan would still be in a liquidity trap and JPY would still be overvalued even if the numbers on your screen told you that NGDP is where its long term trend says it should be.

  36. Gravatar of david stinson david stinson
    23. May 2012 at 15:48

    ” You decide whether a currency is under or overvalued by looking at whether aggregate demand is at an appropriate level.”

    Am I correct in thinking that this implies that if the often expressed view that ECB policy is dictated by, in effect, maintaining monetary equilibrium in Germany is correct, then Germany could not be considered to have benefited from an undervalued currency (in the form of the euro)?

  37. Gravatar of Robert Robert
    23. May 2012 at 22:21

    Major_Freedom,

    Here’s the full transcript of the AEI talk.

    http://www.filejumbo.com/Download/348F70E6EFF72E48

    Sorry, had to upload it myself since I couldn’t find a copy online (luckily my library had it).

  38. Gravatar of Paul Andrews Paul Andrews
    23. May 2012 at 22:49

    Scott,

    “the people who matter (market participants) pay lots of attention to the Fed. Rumors of QE2 had a dramatic impact on asset prices”

    Paul: “This contradicts your previous statements that Fed asset purchases are made at market prices.”

    Scott: “…Asset prices move on changes in expected future policy, not the actual purchases…”

    If the Fed never purchased, but only made announcements, would their announcements affect prices in the same way as their announcements do at present?

  39. Gravatar of Paul Andrews Paul Andrews
    23. May 2012 at 23:35

    Robert,

    Thanks for linking to the Hayek speech. What Hayek discusses in the speech has very little to do with what Scott calls NGDP targeting. Hayek says that he would do whatever he could to prevent a secondary deflation, after a deflation has already commenced. This is a far cry from consistently aiming for a particular level of NGDP growth, in good times and bad, using inflation to make up for any lapses in RGDP growth.

    The paper also includes this:

    “Let me emphasize, in conclusion, that I am not arguing that another Great Depression of the type of the 1930s is inevitable. Even then, such a long-lasting and severe depression was not necessary, but was largely due to the foolishness of the policies pursued. We need not move into an equally serious and general depression if we avoid equally foolish policies – which included, in my opinion, the attempts made after 1929 to maintain demand and wages, policies initiated by President Hoover and then expanded by President Roosevelt.”

    I think that tells us pretty clearly where Hayek would stand on Scott’s prescriptions. (Note: Scott actually prefers nominal wage targeting to NGDP targeting but sees it as impractical politically).

  40. Gravatar of Robert Robert
    24. May 2012 at 00:22

    Paul,

    The bit that jumps out at me is this:

    “The moment there is any sign that the total income stream may actually shrink, I should certainly not only try everything in my power to prevent it from dwindling, but I should announce beforehand that I would do so in the event the problem arose”

    He talks about the awfulness of inflation, as usual, but there’s also this bit:

    “I would no longer maintain, as I did in the early ’30s, that… a short period of deflation would be desirable. Today I believe that deflation has no recognizable function whatever, and there is no justification for supporting or permitting a process of deflation”

    Now the thing to recognise is the unfortunate way the terms inflation/deflation are used. He’s not talking about supply inflation/deflation. He’s talking about demand inflation/deflation, as is obvious from the fact that he’s constantly qualifying his remarks with respect to wage rigidity. He’s talking about the inflation/deflation which affects nominal wages. That is, rising/falling NGDP. From his speech it’s very clear that he wants constant nominal income (an NGDP target with 0% growth).

  41. Gravatar of Major_Freedom Major_Freedom
    24. May 2012 at 00:41

    Robert:

    Brilliant, Robert. Thanks.

  42. Gravatar of Major_Freedom Major_Freedom
    24. May 2012 at 00:53

    Robert:

    From his speech it’s very clear that he wants constant nominal income (an NGDP target with 0% growth).

    At what level though? Worldwide, or country level? In his other writings, he said doing that at the country level would be a bad idea, but at the global level, it would be “rational.”

  43. Gravatar of Paul Andrews Paul Andrews
    24. May 2012 at 02:25

    Robert,

    The bit that jumped out at you needs to be read in context:

    Dr. Harbeler: “I was very glad you said that you find some justification in the view that depressions are aggravated by a cumulative spiral and that there is such a thing as a secondary deflation. Don’t you think it is possible to do somethong about that aggravation without recreating the fundamental maladjustments which, in your opinion, caused the depression?”

    Professor Hayek: “I hope I implied this. The moment there is any sign that the total income stream may actually shrink, I should certainly not only try everything in my power to prevent it from dwindling, but I should announce beforehand that I would do so in the event the problem arose. I am only a little upset by the arguments used now: at a time when the quantity of money is still lustily increasing, people are already talking about combatting deflation although there is nothing like a deflation going on. The time for action will have come once deflation starts.”

    It’s clear he is only referring to maintaining the prior NGDP level (i.e. 0% NGDP growth, not “trend growth”), and only in a specific type of scenario (not continuously through good times and bad). He goes on to state that reflation would only be advisable if there was a strong danger of significant political instability.

    What little doubt may remain as to his meaning can be resolved by remembering that the above is an off-the-cuff unprepared answer to a question without notice. The conclusion to his speech, which was prepared, and holds more weight because he intentionally made it his conclusion, removes any doubt:

    “Let me emphasize, in conclusion, that I am not arguing that another Great Depression of the type of the 1930s is inevitable. Even then, such a long-lasting and severe depression was not necessary, but was largely due to the foolishness of the policies pursued. We need not move into an equally serious and general depression if we avoid equally foolish policies – which included, in my opinion, the attempts made after 1929 to maintain demand and wages, policies initiated by President Hoover and then expanded by President Roosevelt.”

  44. Gravatar of ssumner ssumner
    24. May 2012 at 05:38

    Morgan, Of course the higher NGDPLT means more inflation.

    MF, No, Hayek said repeatedly that he favored NGDP targeting.

    Thanks David, To bad about his support for IT.

    Robert, Thanks, but you are wasting your time with MF.

    Orionorbit, You said;

    “Krugman has shown this very convincingly in his article about Japan’s liquidity trap.”

    I’ve discredited this view in many posts. Japanese monetary actions do affect the exchange rate, contrary to Krugman. He has completely misinterpreted what the BOJ was up to in the 2000s, claiming they wanted to inflate, but failed. But that’s clearly not what’s going on. They had to be pulled kicking and screaming into a 1% inflation target earlier this year. Krugman made similar claims about Switzerland, which have been discredited. Worst case is that Japan owns the entire global economy. Is that so bad for Japan?

    You said;

    “It is too low inflation that causes a depressed NGDP AND an overvalued JPY, it is NOT the case that too low NGDP causes an overvalued JPY. If NGDP got back to trend because of a huge positive supply side shock, japan would still be in a liquidity trap and JPY would still be overvalued even if the numbers on your screen told you that NGDP is where its long term trend says it should be.”

    You shouldn’t even talk about inflation, it only confuses the issue. The higher the trend NGDP growth rate, the higher the equilibrium interest rate. Raise NGDP growth enough and the equilibrium rate rises above zero. It doesn’t matter whether you do so via real growth or higher inflation.

    David, Exactly. Let’s not forget that in 2005 Germany had very high unemployment, and was called the sick man of Europe. Where were the people claiming ECB policy favors Germany back in 2005? Germany did an internal devaluation to get competitive.

    BTW, one reason I think ECB policy is off course is that it’s roughly appropriate for Germany, but too tight for the average of the entire eurozone.

    Paul, You asked:

    “If the Fed never purchased, but only made announcements, would their announcements affect prices in the same way as their announcements do at present?”

    No. It must be backed up with purchases to be credible. But if credible, prices move on the news, not the purchases.

    MF, You asked;

    “At what level though? Worldwide, or country level? In his other writings, he said doing that at the country level would be a bad idea, but at the global level, it would be “rational.””

    As I already explained to you, there was a gold standard at the time. Any country part of that international system could not control its own NGDP. It had to work with other countries to control the global NGDP for the entire gold standard system. There’s nothing controversial about this, it’s standard theory of fixed exchange rate regimes.

  45. Gravatar of Morgan Warstler Morgan Warstler
    24. May 2012 at 05:45

    Scott, if you are willing to say it allowed, why not answer my actual point:

    “Since we know 7% NGDPLT = more inflation.

    3% is Woolsey’s number – and a great number indeed.

    My question is, what keeps the NGDPLT % from changing on political winds?

    If it can change, then expectations are out the door.

    This is my real and VERY TRICKY point: ULTIMATELY the # comes down to FORCE.

    It is better to have a lower # to start (less inflation), that keeps the power in the hands of the hegemony (the savers), so that they can maintain the political will to KEEP THE NGDPLT the same.

    Basically, to ensure the tranquility of a true LT that goes on and on and on, we ahve to keep Dems from having any say over the #.

    Don’t we WANT the NGDPLT number to be low enough that the mob can’t touch it?”

    —–

    Low inflation keeps the powers that be in power…

    So why not favor a low enough inflation target that we are more sure there won’t be lots of moving around the NGDPLT target?

  46. Gravatar of Paul Andrews Paul Andrews
    24. May 2012 at 14:19

    Scott,

    “the people who matter (market participants) pay lots of attention to the Fed. Rumors of QE2 had a dramatic impact on asset prices”

    Paul: “This contradicts your previous statements that Fed asset purchases are made at market prices.”

    Scott: “…Asset prices move on changes in expected future policy, not the actual purchases…”

    Paul: “If the Fed never purchased, but only made announcements, would their announcements affect prices in the same way as their announcements do at present?”

    Scott: “No. It must be backed up with purchases to be credible. But if credible, prices move on the news, not the purchases.”

    So when you say that the Fed always purchases at market prices, you mean that the Fed purchases at prices that have been influenced by previous Fed purchases and announcements?

  47. Gravatar of Paul Andrews Paul Andrews
    24. May 2012 at 14:25

    Scott,

    “MF, No, Hayek said repeatedly that he favored NGDP targeting.”

    Could you please provide links or direct quotes with relevant context? The main quotation that seems to be on the net is the one from the AEI speech above, and it’s clear that he did not favor anything like the kind of NGDP targeting that you propose. Happy to be proven wrong if you can provide links.

  48. Gravatar of Major_Freedom Major_Freedom
    24. May 2012 at 15:42

    Paul Andrews:

    You won’t get them, because Hayek’s name is being used by market monetarists for their own agenda, regardless of what he actually said and believed.

  49. Gravatar of Major_Freedom Major_Freedom
    24. May 2012 at 15:58

    ssumner:

    MF, No, Hayek said repeatedly that he favored NGDP targeting.

    No, Hayek did not say repeatedly that he favored NGDP targeting. I posted quotes in black and white that show he did not favor what you advocate.

    “At what level though? Worldwide, or country level? In his other writings, he said doing that at the country level would be a bad idea, but at the global level, it would be “rational.””

    there was a gold standard at the time. Any country part of that international system could not control its own NGDP. It had to work with other countries to control the global NGDP for the entire gold standard system. There’s nothing controversial about this, it’s standard theory of fixed exchange rate regimes.

    As I already explained to you, it’s not that a specific country could was not able to control its own NGDP that was the “problem”, that’s just you introducing your own conception of what the problem was, and putting that into Hayek’s mouth. In reality, it’s that he thought a specific country attempting to control its own NGDP would cause instability in the international markets, period. Hayek knew that the price system, if it were to function properly at the international stage, required country level NGDPs to fluctuate according to world supply and demand fluctuations, exactly like that occurs within countries. He thought NGDP targeting could only be “rational” at the international stage, by a world central bank. Hayek thought it would have caused instability for the Fed to reverse it with inflation and deflation of the local money supply to keep country level spending growing or constant.

    He is just using your logic of city to city and state to state level of NGDP rising and falling within the context of an optimal currency zone, which is “OK”, and he applied it to a country to country level of rising and falling NGDP within the context of the world market.

    You keep repeating that Hayek said he favored NGDP targeting, and yet you have not posted a single quote from Hayek. I have. Robert has. Paul knows you’re blowing smoke.

    Robert:

    ssumner said: “Robert, Thanks, but you are wasting your time with MF.”

    Robert, Sumner has an obvious agenda to get his readers to ignore me. At least you are actually posting words that Hayek actually wrote, unlike some people who prefer to stick their fingers in their ears and their hands over their eyes because they are so convinced that Hayek is on their side. He wasn’t.

  50. Gravatar of Robert Robert
    24. May 2012 at 16:27

    Major_Freedom,

    I haven’t read enough of Hayek, so I’m happy to postpone claims about his opinion on NGDP targeting until I see more. Perhaps we can make a slightly weaker claim, with the information available, that still manages to get the main market monetarist insight across to Austrian school proponents which we can agree on:

    In his speech he makes very clear his opinion on the importance of wage rigidity and the danger of deflation (falling nominal income). The two key quotes which deserve attention are:

    Once you have the kind of situation in which there already exists extensive unemployment, there is thus a tendency to induce a cumulative process of secondary deflation, which may go on for a very long time. I am the last to deny… that in these circumstances, monetary counteractions, deliberate attempts to maintain the money stream, are appropriate”

    And the above quote regarding not allowing the total income stream to fall.

    Do you agree that from this speech we can conclude that Hayek would regard the current situation – in which nominal income fell 9% below trend! – as overly tight monetary policy (as he regarded policy in the Great Depression); and do you think he would recommend attempting to restore the total income stream?

  51. Gravatar of dwb dwb
    24. May 2012 at 16:44

    @robert,
    Hayek is like the bible, there is a passage to support every opinion it seems. Hayek was in favor of stabilizing money incomes after he was against it. I am sure Hayek was a smart guy, but why do we care whether he was for it or against?

  52. Gravatar of Robert Robert
    24. May 2012 at 17:04

    dwb,

    I’m interested because I’m yet to find an internet Austrian who’s willing to admit that there’s such a thing as tight money.

  53. Gravatar of dwb dwb
    24. May 2012 at 17:33

    if that ever happens things have gotten so bad ive started stockpiling water bottles canned good and ammo.

  54. Gravatar of Major_Freedom Major_Freedom
    24. May 2012 at 18:06

    Robert

    I’m interested because I’m yet to find an internet Austrian who’s willing to admit that there’s such a thing as tight money.

    I admit that any quantity of money is just as efficacious for functioning as a medium of exchange, as any other quantity of money, and that additional money into the market doesn’t benefit the general population, but only the initial receivers, while it reduces the purchasing power of everyone else’s incomes and cash balances.

    The implicit question you are asking is how much money is the proper amount of money. Well, I answer by saying only the market process can reveal such things to me, the same way that only the market process can reveal to me how many cars there should be, how many houses, office buildings, etc.

    I do not hold that any one person or any one group of people can know such things, such as counterfeiters, or central banks.

    I haven’t read enough of Hayek, so I’m happy to postpone claims about his opinion on NGDP targeting until I see more. Perhaps we can make a slightly weaker claim, with the information available, that still manages to get the main market monetarist insight across to Austrian school proponents which we can agree on:

    In his speech he makes very clear his opinion on the importance of wage rigidity and the danger of deflation (falling nominal income). The two key quotes which deserve attention are:

    “Once you have the kind of situation in which there already exists extensive unemployment, there is thus a tendency to induce a cumulative process of secondary deflation, which may go on for a very long time. I am the last to deny… that in these circumstances, monetary counteractions, deliberate attempts to maintain the money stream, are appropriate.”

    And the above quote regarding not allowing the total income stream to fall.

    Combine those quotes with this quote:

    “The theory which has been guiding monetary and financial policy during the last thirty years, and which I contend is largely the product of such a mistaken conception of the proper scientific procedure, consists in the assertion that there exists a simple positive correlation between total employment and the size of the aggregate demand for goods and services; it leads to the belief that we can permanently assure full employment by maintaining total money expenditure at an appropriate level. Among the various theories advanced to account for extensive unemployment, this is probably the only one in support of which strong quantitative evidence can be adduced. I nevertheless regard it as fundamentally false, and to act upon it, as we now experience, as very harmful.”

    and this quote:

    “This means of course that a really rational monetary policy could be carried out only by an international monetary authority, or at any rate by the closest cooperation of the national authorities and with the common aim of making the circulation of each country behave as nearly as possible as if it were part of an intelligently regulated international system.”

    Here it is clear that Hayek was OK with country level NGDP rising and falling in accordance with world supply and demand.

    Do you agree that from this speech we can conclude that Hayek would regard the current situation – in which nominal income fell 9% below trend! – as overly tight monetary policy (as he regarded policy in the Great Depression); and do you think he would recommend attempting to restore the total income stream?

    Not if the decline in spending was a result of money and spending leaving the US, and being used elsewhere and increasing money balances and spending there. That’s how Hayek viewed international stability being maximized, the same way we stabilize the US market by allowing localized increases and decreases in spending. Imagine what would happen if monetary policy were such that there was city level NGDP 5% targeting. Just consider the instability it would generate in the US country level market. Now use that logic for the US country in a context of the world market. It would be just as destabilizing.

    When Hayek wrote of stabilizing income, his idea what stabilizing income at the international level only, where the only “rational” monetary policy was possible in his view. He said to the extent that there is country level central banks, they should mimic, as close as possible a world central bank scenario, which of course means to allow country level NGDP to rise and fall as world supply and demand conditions change.

    Market monetarists like Sumner are completely deluded when they believe Hayek would have been in favor of the NGDP targeting they’re talking about. Sumner is basically saying this:

    “It’s OK to have city level NGDP targeting. Hayek would agree with me. After all, just look at his statements about not wanting nominal incomes to fall! Obviously he’d be in favor of city level NGDP targeting.”

    It’s just as asinine to use Hayek to defend local NGDP at the city level, as it is to use Hayek to defend local NGDP at the country level.

    Hayek said in his Nobel lecture that it would be very harmful to MAINTAIN total money expenditure AT AN APPROPRIATE LEVEL. Sumner fell over himself trying to interpret that as meaning NGDP rising and falling to target employment. Hilarious.

    dwb:

    Hayek is like the bible, there is a passage to support every opinion it seems. Hayek was in favor of stabilizing money incomes after he was against it. I am sure Hayek was a smart guy, but why do we care whether he was for it or against?

    By his writings, he was in favor of stabilizing income at the international level, and said that countries should not engage in country level stabilization.

    If market monetarists can at least accept that Hayek was against using inflation to stabilize aggregate spending in particular cities in a country context, is it really so hard to believe he would think the same thing about countries in a global context?

  55. Gravatar of Paul Andrews Paul Andrews
    24. May 2012 at 21:30

    Robert:

    “Perhaps we can make a slightly weaker claim, with the information available, that still manages to get the main market monetarist insight across to Austrian school proponents which we can agree on”

    There is no insight in the fact that inflation can be used to goose NGDP.

    If market monetarists wish to teach people anything, or in fact prove that they have anything at all to teach, perhaps they could publish a formal model so that

    a) their assumptions are explicitly stated and people are able to see to what extent they agree and disagree with those assumptions

    b) people can see whether the claimed outcomes could possibly come about, given the stated assumptions

    c) people can analyze the potential risks

    I believe this would assist with dialog and prevent the often circular arguments which come about through inconsistent use of terminology.

  56. Gravatar of ssumner ssumner
    25. May 2012 at 12:02

    Morgan, There are pros and cons to a low number, as I’ve discussed many times.

    Paul, You said;

    “So when you say that the Fed always purchases at market prices, you mean that the Fed purchases at prices that have been influenced by previous Fed purchases and announcements?”

    Yes.

    Regarding Hayek, Please don’t follow MF into la la land. You won’t be taken seriously here. Everyone who has read extensive Hayek writings on macro knows he favored a stable NGDP, just as everyone knows Friedman favored money supply target and Bernanke favors inflation targeting. I don’t have time to go the the library and dig up lots of old Hayek books right now—you can search for the quotations just as easily as I can. I can’t stand commenters who demand I produce quotations about points where general agreement among all the experts, as if I don’t have better things to do.

    If MF believes Hayek favored some other target, let him produce the quotation.

    And as far as out of context, MF has already shown he has no ability to understand context, as he invariably misinterprets what Hayek is saying. Recently he produced a quotation that supposedly showed Hayek opposed targeting NGDP, which in fact did no such thing. If you haven’t extensively studied the interwar period you won’t be able to interpret the quotations.

  57. Gravatar of Major_Freedom Major_Freedom
    25. May 2012 at 12:36

    ssumner:

    If MF believes Hayek favored some other target, let him produce the quotation.

    I already did. I already posted quotes that show Hayek saying the only rational monetary policy is at the international stage, with an international central bank issuing an international money, and that if countries are going to have independent central banks, they should mimic as closely as possible a world NGDP targeting scheme, which of course means he believed country NGDP should rise and fall in a context of world demand, exactly like you say city and state level NGDP should rise and fall in a context of country demand.

    You have thus far displayed absolutely zero ability to understand the context of Hayek’s writings. You have not once posted a single quote from Hayek. You demand that I post quotes, and the funny thing is that I already posted them. You have not. You have posted ZILCH.

    You continue to misinterpret what Hayek said, and you continue to take Hayek’s short spiels on income stabilization out of context.

    Hayek did in fact oppose what you are advocating. He was against countries engaging in NGDP targeting, despite changes in world supply and demand conditions. He said it would cause worldwide instability.

    If you haven’t read enough of Hayek, you will continue to be unable to understand his quotes and you will continue to be unable to interpret them correctly.

    Paul:

    Don’t take Sumner’s word on faith. He hasn’t posted any quotes, and for good reason. It’s because he knows all the quotes, when taken in context, show Hayek would have been AGAINST Sumner’s NGDP targeting scheme.

    Sumner keeps claiming “everyone who has read Hayek believes me”, he’s taking you for a long ride off a short pier. He said he doesn’t have time to dig up the quotes, but that’s just posturing. He says he “can’t stand” commenters who “dare” question the almighty non-existent general agreement that Hayek would favor Sumner’s NGDP targeting scheme? That’s because he can’t stand independent thinking that refutes his thinking that depends on ad populum.

    As for Sumner’s threat that you won’t be taken seriously here, well, that should show you EXACTLY his actual motivation. It isn’t intellectual or pursuit of truth. It’s APPEARANCES only.

  58. Gravatar of orionorbit orionorbit
    25. May 2012 at 14:12

    Scott, I don’t have the article before me but I’m 99% sure that krugman’s point is that it’s not enough for the BoJ to weaken the jpy, unless it weakens it sufficiently to generate higher inflation expectations. If i remember correctly what happens in equilibrium depends only on how much jpy the boj prints, it doesn’t matter if it buys usd or bonds. All it matters is that the boj creates enough money to change inflation expectations.

    For this reason, I don’t think mentioning inflation is confusing, after all the boj controls inflation expectations, not real gdp growth. I agree that the aim of the policy is the same as NGDP targeting, but to me it looks important that the cb acknowledges that what it’s trying to do is to generate inflation. For instance if the CB is forcasting 1% inflation, it could buy enough bonds to create inflation or it can simply tell the market that it will keep buying bonds until we get 2% inflation. If the market believes the CB it will only quote bond rates that correspond to 2% inflation, so that the CB will not have to take on any duration risk. I imagine NGDP targeting works along the same lines…

  59. Gravatar of Paul Andrews Paul Andrews
    25. May 2012 at 14:30

    Scott,

    Paul: “So when you say that the Fed always purchases at market prices, you mean that the Fed purchases at prices that have been influenced by previous Fed purchases and announcements?”

    Scott: “Yes.”

    Thanks for clearing this up. So to sum up, your term “market prices” means “market prices with Fed actions taken into account”, and you agree that “market prices with Fed actions taken into account” are higher than “market prices as they would have been without Fed actions”, if those actions are combinations of past purchases and announcements about upcoming purchases.

    In your post here: https://www.themoneyillusion.com/?p=14029 you quote Mark Spitznagel: “In the 20th century, the economists of the Austrian school built upon this fact as their central monetary tenet. Ludwig von Mises and his students demonstrated how an increase in money supply is beneficial to those who get it first and is detrimental to those who get it last.” You respond as follows: “This is not correct. If I sold some bonds to the Fed at market prices, I would not benefit.”

    If you held bonds with a certain market price, then the Fed made an announcement that increased that market price, and you sold them to the Fed, then you would benefit by comparison to the counterfactual situation in which the Fed made no annoucement. Therefore your point against Spitznagel is invalid, according to your clarified definition of your use of the term “market prices”.

  60. Gravatar of Paul Andrews Paul Andrews
    25. May 2012 at 14:42

    Scott,

    “MF, No, Hayek said repeatedly that he favored NGDP targeting.”

    Paul: “Could you please provide links or direct quotes with relevant context? The main quotation that seems to be on the net is the one from the AEI speech above, and it’s clear that he did not favor anything like the kind of NGDP targeting that you propose. Happy to be proven wrong if you can provide links.”

    Scott: “Regarding Hayek, Please don’t follow MF into la la land. You won’t be taken seriously here. Everyone who has read extensive Hayek writings on macro knows he favored a stable NGDP, just as everyone knows Friedman favored money supply target and Bernanke favors inflation targeting. I don’t have time to go the the library and dig up lots of old Hayek books right now””you can search for the quotations just as easily as I can. I can’t stand commenters who demand I produce quotations about points where general agreement among all the experts, as if I don’t have better things to do.”

    When you say Hayek favoured a stable NGDP, do you mean that he favoured a stable NGDP growth level as you do, or something different to what you favour? Also do you mean that he favoured a stable NGDP at all times, or merely stabilization in extreme circumstances?

    If you agree that what he suggested is quite different to what you are proposing then I personally don’t need to see any quotations, and I think most reasonable people would agree that he favoured a stabilization of a level of NGDP (not growth) under extreme circumstances. However I think it’s fair to request quotations when you suggest that he would somehow agree with your proposals. I have not seen or read any evidence for this.

  61. Gravatar of ssumner ssumner
    27. May 2012 at 11:01

    orionorbit; I agree with much of what you say. However, when you said;

    “I agree that the aim of the policy is the same as NGDP targeting, but to me it looks important that the cb acknowledges that what it’s trying to do is to generate inflation.”

    That’s exactly the problem, they aren’t trying to generate inflation, they want more NGDP growth. And for whatever NGDP growth they achieve, they’d like as little inflation and as much RGDP growth as possible. Talking about inflation only confuses the issue.

    Krugman claims the BOJ can’t depreciate the yen, at least consistently. That’s where he’s wrong.

    Paul, You said;

    “Thanks for clearing this up. So to sum up, your term “market prices” means “market prices with Fed actions taken into account”, and you agree that “market prices with Fed actions taken into account” are higher than “market prices as they would have been without Fed actions”, if those actions are combinations of past purchases and announcements about upcoming purchases.”

    Not at all, if the Fed announced it was going to buy enough T-bonds to trigger hyperinflation, then T-bond prices would fall. Lars Christensen has a new post showing that during recent years tight money has led to lower bond yields and higher bond prices.

    Easy money is beneficial to holders of assets whose real value rises with easy money and inflation. It’s not at all clear that those people are creditors.

    Regarding you second question, yes, he favored targeting the level of GDP, not the growth rate. But it’s still NGDP targeting.

    MF digs up quotes showing Hayek understood you can’t target NGDP if you are part of an international gold standard. Duh.

  62. Gravatar of Paul Andrews Paul Andrews
    27. May 2012 at 16:15

    Scott,

    “the people who matter (market participants) pay lots of attention to the Fed. Rumors of QE2 had a dramatic impact on asset prices”

    Paul: “This contradicts your previous statements that Fed asset purchases are made at market prices.”

    Scott: “…Asset prices move on changes in expected future policy, not the actual purchases…”

    Paul: “If the Fed never purchased, but only made announcements, would their announcements affect prices in the same way as their announcements do at present?”

    Scott: “No. It must be backed up with purchases to be credible. But if credible, prices move on the news, not the purchases.”

    Paul: “So when you say that the Fed always purchases at market prices, you mean that the Fed purchases at prices that have been influenced by previous Fed purchases and announcements?”

    Scott: “Yes.”

    Paul: “Thanks for clearing this up. So to sum up, your term “market prices” means “market prices with Fed actions taken into account”, and you agree that “market prices with Fed actions taken into account” are higher than “market prices as they would have been without Fed actions”, if those actions are combinations of past purchases and announcements about upcoming purchases.”

    Scott: “Not at all, if the Fed announced it was going to buy enough T-bonds to trigger hyperinflation, then T-bond prices would fall. Lars Christensen has a new post showing that during recent years tight money has led to lower bond yields and higher bond prices.”

    OK, point taken and agreed. So to try to sum up again, your term “market prices” means “market prices with Fed actions taken into account”, and you agree that “market prices with Fed actions taken into account” are higher or lower than “market prices as they would have been without Fed actions”, if those actions are combinations of past purchases and announcements about upcoming purchases.

    Is that a fair summation?

  63. Gravatar of Paul Andrews Paul Andrews
    27. May 2012 at 16:33

    Scott,

    “MF, No, Hayek said repeatedly that he favored NGDP targeting.”

    Paul: “Could you please provide links or direct quotes with relevant context? The main quotation that seems to be on the net is the one from the AEI speech above, and it’s clear that he did not favor anything like the kind of NGDP targeting that you propose. Happy to be proven wrong if you can provide links.”

    Scott: “Regarding Hayek, Please don’t follow MF into la la land. You won’t be taken seriously here. Everyone who has read extensive Hayek writings on macro knows he favored a stable NGDP, just as everyone knows Friedman favored money supply target and Bernanke favors inflation targeting. I don’t have time to go the the library and dig up lots of old Hayek books right now””you can search for the quotations just as easily as I can. I can’t stand commenters who demand I produce quotations about points where general agreement among all the experts, as if I don’t have better things to do.”

    Paul: “When you say Hayek favoured a stable NGDP, do you mean that he favoured a stable NGDP growth level as you do, or something different to what you favour? Also do you mean that he favoured a stable NGDP at all times, or merely stabilization in extreme circumstances? If you agree that what he suggested is quite different to what you are proposing then I personally don’t need to see any quotations, and I think most reasonable people would agree that he favoured a stabilization of a level of NGDP (not growth) under extreme circumstances. However I think it’s fair to request quotations when you suggest that he would somehow agree with your proposals. I have not seen or read any evidence for this.”

    Scott: “yes, he favored targeting the level of GDP, not the growth rate. But it’s still NGDP targeting”

    OK, so you agree that he proposed stabilization of NGDP in some circumstances, and that he did not propose targeting a level of NGDP growth. These are very different policies, but you call them by the same name.

    Would it not aid conversation and understanding if you did not refer to these two very different policies using the same term?

    Doesn’t your argument suffer whenever you imply that an esteemed economist supports your policy proposal, merely on the basis that we can give his policy the same name as your policy?

  64. Gravatar of Major_Freedom Major_Freedom
    27. May 2012 at 16:35

    MF digs up quotes showing Hayek understood you can’t target NGDP if you are part of an international gold standard. Duh.

    You’re misinterpreting Hayek once again.

    It’s not that you can’t target country level NGDP while on an international gold standard, it’s that actually doing so at the national level would disrupt the international market, if world supply and demand conditions were to call for an increase or decrease in country level money supply and “spending”.

    The key thing about what Hayek believed is that if country level central banking is to exist, it should mimic a world central banking system with a world currency as close as possible. What does that mean? It means NGDP from city to city, state to state, and yes, even country to country, should be able to fluctuate up or down in accordance with world supply and demand. That is what would mimic a world central banking system. A system where each country’s NGDP grows at 5% would be destabilizing exactly like a system where each state’s NGDP, or each city’s NGDP, grows at 5%.

    You yourself believe that instability would be caused in the US market if money printing were to be used to get NGDP to rise 5% each year in California, or Texas, despite US market conditions that would lead to an increase or decrease in NGDP in these states. Notice how you don’t give a rat’s ass if NGDP fell in California, if that is what the US market conditions lead to, despite all the blather on sticky wages and prices? Well, the same not giving a rat’s ass follows for countries as well in a world market context.

    Is it really so hard for you to believe that country level NGDP targeting would create instability in the world market, seeing as how the logic is precisely the same as it is for state to state NGDP in the US market? Economics knows no boundaries. Economic laws don’t suddenly change when you cross imaginary borders. Political laws might change, but economic laws are universal.

    If you refuse to, or if you are unable to, interpret Hayek correctly, then at least try to understand the double standard in your own worldview!

  65. Gravatar of Major_Freedom Major_Freedom
    27. May 2012 at 16:55

    Paul Andrews:

    Would it not aid conversation and understanding if you did not refer to these two very different policies using the same term?

    But how else can Sumner use Hayek as an intellectual sanction for his own NGDP plan? If we only went by what Hayek wrote, then market monetarists could not use him for their own agenda.

  66. Gravatar of ssumner ssumner
    28. May 2012 at 12:29

    Paul, We both favor level targeting of NGDP. The fact that I prefer a slightly positive track and he prefers a stable track is incidental. The key is that we both prefer level targeting, not growth rate targeting.

  67. Gravatar of Paul Andrews Paul Andrews
    28. May 2012 at 15:29

    Scott,

    “The key is that we both prefer level targeting, not growth rate targeting.”

    Can you please clarify what you mean when you say you do not favour growth rate targeting? I was under the impression you favoured targeting a NGDP growth rate of around 5%?

  68. Gravatar of Paul Andrews Paul Andrews
    29. May 2012 at 19:19

    Scott,

    It seems to me that by “level targeting” you mean targeting a particular NGDP growth rate (e.g. 5%), and correcting for undershoots and overshoots.

    Is that correct?

  69. Gravatar of Major_Freedom Major_Freedom
    29. May 2012 at 21:15

    ssumner:

    Paul, We both favor level targeting of NGDP.

    Again, at what level? Hayek said the only rational monetary policy is an international one, with an international currency, stabilizing international demand, and that if country level central banks should exist, they should mimic a world central banking system as closely as possible, which means fluctuating NGDP country to country.

    He would not have favored your country level NGDP targeting scheme, the same way you do not favor city or state level NGDP targeting schemes. He said it would be very harmful and would destabilize the world market for countries to act in this way.

  70. Gravatar of Major_Freedom Major_Freedom
    29. May 2012 at 21:45

    Question for market monetarists:

    1. Do you agree that an inflation policy of “stabilizing” spending at the individual firm level, would destabilize the inter-firm market, and that economic stabilization can only be had if firm level spending can fluctuate in accordance with supply and demand for each firm’s output?

    2. Do you agree that an inflation policy of “stabilizing” spending at the individual city level, would destabilize the inter-city market, and that economic stabilization can only be had if city level spending can fluctuate in accordance with supply and demand for each city’s output?

    3. Do you agree that an inflation policy of “stabilizing” spending at the individual county level, would destabilize the inter-county market, and that economic stabilization can only be had if county level spending can fluctuate in accordance with supply and demand for each county’s output?

    4. Do you agree that an inflation policy of “stabilizing” spending at the individual state level, would destabilize the inter-state market, and that economic stabilization can only be had if state level spending can fluctuate in accordance with supply and demand for each state’s output?

    5. Do you agree that an inflation policy of “stabilizing” spending at the individual country level, would destabilize the inter-country market, and that economic stabilization can only be had if country level spending can fluctuate in accordance with supply and demand for each country’s output?

    Why in the bleeding heck do you yahoos answer yes 4 times, but as soon as you get to the last question, you turn up into down, white into black, in into out, and say no?

    You people are crazier than a bag of wet cats.

  71. Gravatar of ssumner ssumner
    30. May 2012 at 12:50

    Paul, Yes.

  72. Gravatar of Paul Andrews Paul Andrews
    30. May 2012 at 17:18

    Scott,

    “MF, No, Hayek said repeatedly that he favored NGDP targeting.”

    Paul: “Could you please provide links or direct quotes with relevant context? The main quotation that seems to be on the net is the one from the AEI speech above, and it’s clear that he did not favor anything like the kind of NGDP targeting that you propose. Happy to be proven wrong if you can provide links.”

    Scott: “Regarding Hayek, Please don’t follow MF into la la land. You won’t be taken seriously here. Everyone who has read extensive Hayek writings on macro knows he favored a stable NGDP, just as everyone knows Friedman favored money supply target and Bernanke favors inflation targeting. I don’t have time to go the the library and dig up lots of old Hayek books right now””you can search for the quotations just as easily as I can. I can’t stand commenters who demand I produce quotations about points where general agreement among all the experts, as if I don’t have better things to do.”

    Paul: “When you say Hayek favoured a stable NGDP, do you mean that he favoured a stable NGDP growth level as you do, or something different to what you favour? Also do you mean that he favoured a stable NGDP at all times, or merely stabilization in extreme circumstances? If you agree that what he suggested is quite different to what you are proposing then I personally don’t need to see any quotations, and I think most reasonable people would agree that he favoured a stabilization of a level of NGDP (not growth) under extreme circumstances. However I think it’s fair to request quotations when you suggest that he would somehow agree with your proposals. I have not seen or read any evidence for this.”

    Scott: “yes, he favored targeting the level of GDP, not the growth rate. But it’s still NGDP targeting”

    Paul: “OK, so you agree that he proposed stabilization of NGDP in some circumstances, and that he did not propose targeting a level of NGDP growth. These are very different policies, but you call them by the same name. Would it not aid conversation and understanding if you did not refer to these two very different policies using the same term? Doesn’t your argument suffer whenever you imply that an esteemed economist supports your policy proposal, merely on the basis that we can give his policy the same name as your policy?”

    Scott: “Paul, We both favor level targeting of NGDP. The fact that I prefer a slightly positive track and he prefers a stable track is incidental. The key is that we both prefer level targeting, not growth rate targeting.”

    Paul: “It seems to me that by “level targeting” you mean targeting a particular NGDP growth rate (e.g. 5%), and correcting for undershoots and overshoots. Is that correct?”

    Scott: “Yes”

    So of these three approaches:

    (a) Stabilization of NGDP at some level (no growth);

    (b) Growth rate targeting without correcting for undershoots or overshoots;

    (c) Growth rate targeting with correction for undershoots and overshoots;

    you call (a) and (c) “level targeting”, and in your terminology (b) is not called “growth rate targeting”.

    Is that correct?

  73. Gravatar of Paul Andrews Paul Andrews
    30. May 2012 at 17:21

    Correction:

    So of these three approaches:

    (a) Stabilization of NGDP at some level (no growth);

    (b) Growth rate targeting without correcting for undershoots or overshoots;

    (c) Growth rate targeting with correction for undershoots and overshoots;

    you call (a) and (c) “level targeting”, and in your terminology (b) is called “growth rate targeting” but (c) cannot be.

    Is that correct?

  74. Gravatar of ssumner ssumner
    31. May 2012 at 14:38

    Paul, Yes that’s correct. It’s standard terminology in econ.

  75. Gravatar of Paul Andrews Paul Andrews
    31. May 2012 at 23:01

    Thanks Scott.

    So you favour growth rate targeting with correction for overshoots and undershoots.

    Hayek favoured, in your opinion, stabilization of NGDP at some level, with no growth.

    You characterize these as similar, for the purposes of various articles on the site.

    You say that neither of you support growth rate targeting, despite the fact that you support growth rate targeting with corrections for undershoots and overshoots.

    You also refer to both as “level targeting” without identifying crucial aspects of difference, because this is standard terminology.

    The above are just restatements of what you have stated previously in this thread, so I merely reproduce them concisely for the record.

    Personally I think the characterizations mentioned above rely too much on rhetorical devices rather than on substance, and for this reason amongst others I find your arguments unconvincing.

    Over and above this however, it seems clear to me that Hayek, in 1974 at least, only favoured stabilization of NGDP in extreme cases, not a permanent stabilization. In addition I think it is without doubt that he was clearly opposed to nominal wage targeting (your preferred approach), as is clear from the conclusion of his speech linked to above.

    These further points leave little doubt in my mind that your invocations of Hayek in support of your cause are not helpful to the debate.

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