The anxiety of influence

I notice that there are a lot of posts discussing who influenced whom on NGDP targeting.  Bill Woolsey and Ryan Avent have posts discussing influence in the NGDP targeting area.  Both posts are well worth reading, and I don’t find much to object to.   My general view on this topic is that when we’ve reached the point where even Bob Dylan gets accused of “plagiarism,” then you know our society has become overly obsessed with “originality.”  I agree with Bob, originality is overrated:

Bob Dylan has angrily responded to charges he plagiarized some of his lyrics, calling critics “wussies and pussies” and saying musical appropriation is “part of the folk tradition.”

The “new monetary economics” got interested in the “price” approach to monetary policy during the 1980s.  Then they noticed that Irving Fisher had beat them to it, with his Compensated Dollar Plan of 1913.  This involved adjusting the official price of gold to offset changes in the price level.  Fisher initially thought he had invented the idea, but then someone told him that Aneurin Williams had published a similar idea in the Economic Journal in 1892.  Then Fisher discovered even earlier inventors from the early 1800s, such at Attwood and Rooke.  Eventually he wrote an entire book on “The History of Stable Money” (stable in purchasing power.)  There were many previous inventors, most of whom didn’t know each other.

Woodford wrote a paper on using a variable interest rate on reserves as a policy tool to stabilize inflation, and then discovered later that Robert Hall had done the same in 1983.

The earliest refutation of the liquidity trap argument that I have been able to find was written by John Locke in the 1600s, and involved a sort of reductio ad absurdum argument of repeated reductions in the silver content of the British pound.  There’s nothing new under the sun (including cliches.)

I recall Krugman once suggesting that the market monetarists started out talking about printing money, and only later began to focus on the role of expectations.  Not so; we’ve been doing that from the beginning.  Many outsiders probably think that market monetarism is a new school of thought.  The name is certainly new (thanks to Lars Christensen), but the ideas are several decades old.  David Glasner, Bill Woolsey and I were all working on these ideas in the late 1980s and early 1990s.  People like Earl Thompson and Robert Hall were exploring similar ideas even earlier.

In my view “influence” usually occurs when the recipient has independently developed the idea, or something very close.  That makes the recipient more receptive.  Being receptive is the key, as there are so many ideas swirling around that unless you are in a receptive mood, they won’t stick.  Here’s couple of examples:

1.  Woodford’s student and co-author Gauti Eggertsson published a paper in the September 2008 AER that applied the Woodford/Eggertsson model to the Great Depression.  He cited three of my papers from the 1990s, included a never-published working paper.  I was pleased to see these obscure papers getting noticed in such a high profile way.  I presume that Bernanke tipped off Eggertsson (I believe they were all at Princeton back then) and Eggertsson saw that my analysis of the Great Depression also put a lot of weight on policy expectations.  Eggertsson already had the basic idea, but perhaps my work gave him a bit more confidence that it was applicable to the Great Depression.

2.  When I ran across Woodford’s papers on the importance of policy expectations, I saw that it was quite similar to the approach I was using. But I didn’t have any sort of rigorous theoretical model, and indeed I still find it very difficult to understand how all this works in the theoretical sense (mostly because these expectations models allow for multiple solutions.)  So Woodford’s work gave me confidence that much smarter people than me were able to back up my intuition with rigorous theoretical models.

In both cases we were receptive to what someone else was doing, but had worked out the basic idea on our own.

Off topic, Evan Soltas makes a very interesting argument in an article at Bloomberg on the new Fed policy.  He suggests that Fed’s recent decision creates an entirely new policy framework, and that we can expect the Fed to gradually add more specificity to this framework over time.

Much more likely is a definition of the Fed’s policy target that is clarified in increments. There is a direct precedent for this: the Fed’s introduction of forward guidance of when it would tighten policy. While the Fed first promised low interest rates “for some time” in December 2008, it later clarified its forward guidance — first “for an extended period” in March 2009 and eventually with the time period, “at least mid-2013” in August 2011.

“For some time” is as vague a time frame as “ongoing sustained improvement” is a goal for labor market gains. This obscurity weakens the potency of expectations-based monetary policy.

What seems most likely — and most similar to the evolution of forward guidance — is that the Fed will reapply its economic projections as policy targets. This could happen twice every quarter as it forecasts growth of real GDP, the unemployment rate, and headline and core PCE over the next three years.

George Selgin has a new post showing that the instability of final sales has been a bit greater than the instability of NGDP, and also that final sales might be a better benchmark as to whether money is excessively easy or tight.  Other market monetarists have also made this argument, as well as Bill Niskanen of the Cato Institute, who recent passed away. There’s not much to disagree with in George’s post, I’d just reiterate that if you stop the clock in early 2008, the preceding Fed policy might have been unstable enough to produce a mild recession, the sort we had in 2001, when unemployment peaked at 6.3%. I certain agree with George that we would have been better off in 1990-2008 with a more stable NGDP growth track.  However I still don’t see any causal link between the 2003-06 growth in final sales and the housing bubble, especially since neither final sales nor RGDP grew unusually rapidly during that expansion (compared to other expansions.)  I blame moral hazard and bad regulations.

David Henderson made some comments on my exchange with George Selgin and the issue of Fed credit allocation.  Interested readers can read my reply in his comment section.

Miles Kimball had this to say about Ben Bernanke:

.  .  .  let me say that Ben Bernanke is a superstar central banker in my book. It is a mistake to judge central bankers by a standard of perfection. Central banking is too hard for that. Ben has done a great job in difficult circumstances, as can be seen in David Wessel’s book In Fed We TrustMy guess is that Ben’s biggest mistakes as a central banker have come from deferring too much to other views that were less on-target than his own. Although making monetary policy decision-making less centered on the Chairman of the Fed is the right thing for the long-run future, I think we would have had better monetary policy in the last few years had Ben trusted his own judgment more and asserted himself more strongly. Ben’s mistakes of intellectual humility are the kinds of mistakes a serious seeker of the truth makes.

I wouldn’t call him a superstar, but I have often pointed out that the Fed generally does what a consensus of American economists thinks they should do.  Bernanke has now pushed the Fed a bit beyond that consensus.  That means he has positive value added.  Bernanke’s not the problem; the problem is America’s macroeconomists—they caused the Great Recession.

Miles Kimball also has a wonderful intro to macroeconomics.  Like me, he sees macro as being all about the “deep magic” of money, and the “deeper magic” of the supply-side.

HT:  Dilip



14 Responses to “The anxiety of influence”

  1. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    18. September 2012 at 07:33

    If Bernanke is a superstar, what do we call Greenspan?

  2. Gravatar of Greg Ransom Greg Ransom
    18. September 2012 at 07:35

    Good to see Scott make such a strong case for economists not being complete morons when it comes to the battle space or adaptive niche space of their incredibly rich and complex science — which is to say, glad to see someone pointing out how there are worlds and more of hard thinking already tackled across the history of your discipline which the vast majority of academic economists know absolutely nothing about.

  3. Gravatar of Jeffrey S. Jeffrey S.
    18. September 2012 at 07:36


    I’d call you a superstar. Meanwhile, I’d love to read your response to this:

  4. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    18. September 2012 at 08:21

    Scott, at Henderson’s you wrote;

    ‘Mike, I don’t think the Fed needs more bonds, it already has more than enough to hit a reasonable NGDP target.’

    Just as in the 1930s we had enough ‘high powered money’ due to gold inflows, but sterilized it, thus allowing the ‘money stock’ to actually decline precipitously.

    So, further expansions of the monetary base not being what’s needed, did Bernanke and Co. miss an opportunity?

  5. Gravatar of ssumner ssumner
    18. September 2012 at 08:39

    Thanks Greg.

    Jeffrey, Life’s too short to spend time responded to people like Tamny.

    Patrick, Yes, they missed an opportunity, but big conservative institutions can only do so much at one time, when the profession is not standing behind them encouraging them on.

  6. Gravatar of Saturos Saturos
    18. September 2012 at 09:05

    Wages not so sticky in the Eurozone:

  7. Gravatar of Edward Edward
    18. September 2012 at 09:11


    You said it before in an earlier post that “nominal wage targeting would be the optimal policy” Why? Wouldnt it be a nightmare, politcally speaking. And if it was, implemented good luck selling that to workers, having a Fed official tell them “Okay, as soon as your wages rise above 5%, we’ll tighten.” They’ll be howling for that Fed officials blood.

  8. Gravatar of Wonks Anonymous Wonks Anonymous
    18. September 2012 at 09:41

    Eli Dourado professes to be a fan of yours and NGDP targeting, but has a critique of recent market monetarist celebration:

  9. Gravatar of ssumner ssumner
    18. September 2012 at 11:03

    Edward, Yup, a political nightmare–that’s why I favor NGDP instead.

    Wonks, What market monetarist celebration? The Fed took baby steps in the right direction, but needs to go much further.

  10. Gravatar of Alex Godofsky Alex Godofsky
    18. September 2012 at 11:06

    Edward: theoretically optimal. The political and logistical difficulties are part of why Scott doesn’t actually advocate it.

  11. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    18. September 2012 at 14:14

    ‘Patrick, Yes, they missed an opportunity….’

    Then we won’t have a test of Market Monetarism after all.

  12. Gravatar of Greg Ransom Greg Ransom
    18. September 2012 at 17:07

    Note well that Bernanke & Greenspan were explicitly warning of & fighting against the threat of deflation in the early part of the 2000s — in doing so they were completely outside the consensus, essentially no one else was worried about deflation or was advocating tha the Fed fight the threat of deflation at that time.

    “the Fed generally does what a consensus of American economists thinks they should do.  Bernanke has now pushed the Fed a bit beyond that consensus.”

  13. Gravatar of Benjamin Cole Benjamin Cole
    18. September 2012 at 19:33

    Well, I suppose Bernanke pushed the Fed policy beyond consensus; then on the other hand, the vote was 11-1 in favor of their small open-ended asset purchase plane (QE).

    So he surely had consensus on his board (okay, one dissenter).

    As I expected, the fallout from this QE announcement is minimal. The voting public does not understand monetary policy, let alone QE. Bernanke is being unnecessarily timid.

    I expected more from Bernanke.

  14. Gravatar of ssumner ssumner
    20. September 2012 at 04:16

    Greg, No one else was worried because they were (successfully) fighting against it. And the profession trusted them.

    Wonks, That’s similar to Selgin’s post from about a month back–check out my reply.

Leave a Reply