The beatings will continue until morale improves
This is from the NYT:
FRANKFURT “” The International Monetary Fund, warning of “a sizable risk” that some euro zone countries could suffer a debilitating decline in prices, called on Wednesday for the European Central Bank to pump money into the region’s economy by buying huge volumes of government bonds. . . .
Richard Barwell, an economist at the Royal Bank of Scotland, doubted that the central bank would follow the monetary fund’s advice without evidence of deflation throughout the euro zone. “I think they would view it as being counterproductive,” he said. “It would be alleviating all pressure on policy makers to solve the underlying cause of the problem.”
In the old days doctors usually did more harm than good. They’d prescribe some sort of quack medicine with dangerous side effects. Then when the patient got even worse, they’d up the dosage.
In late 2008 the ECB inflicted an extremely tight monetary policy on the eurozone, which has been maintained ever since. This turned what would have been a modest debt crisis centered in Greece into the greatest debt crisis in world history. And it’s going to get even worse. Then the ECB decided the real problem wasn’t falling NGDP, but rather irresponsible governments that refused to balance their budgets. So they decided to put pressure on these governments with a tight money policy. Even if the afflicted countries did substantial fiscal reforms (as in Portugal, for instance) the deeper drop in NGDP tended to slow the progress toward a balanced budget. This convinced the ECB that the deadbeats were slacking off in their resolve to make painful cuts, and thus another round of tight money was called for.
The beatings will continue until morale improves . . . er, I mean the tight money will continue until budgets are balanced.
PS. There’s another journalist endorsing NGDP targeting, someone with the initials L.S. at Free Exchange:
There is a point here. Why elect politicians to govern the country when the key levers of economic control lie elsewhere? It was the same question asked on Greek squares last month. Liberal Democrats keen to oust Lords from Britain’s Parliament must ponder if it’s worth the bother, when a King down the river holds more power than the lot of them. . . .
At present there is a pretence that the Bank of England’s only target is inflation. Everyone knows this is false: the Bank is pursuing a loose monetary policy to help growth. The Bank should be explicit about this. Rather than keep apologising to the Chancellor for overshooting, the Governor should have a mandate to target GDP too. Nominal GDP targeting would be better than the current charade. The credibility of the Bank and the government would be best served by an official change.
I like the term ‘charade.’ It’s becoming increasingly clear that inflation targeting was a mistake, and that Bennett McCallum was right all along. NGDP targeting is the logical policy, as it best reflects the actual goal of policymakers around the world. Let’s end this charade.
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19. July 2012 at 08:13
“In the old days doctors usually did more harm than good. They’d prescribe some sort of quack medicine with dangerous side effects. Then when the patient got even worse, they’d up the dosage.”
That pretty much sums up monetary inflation.
19. July 2012 at 08:32
So, Scott, when (in your view, but not mine), the Fed departs from its relatively vague mandate, you urge it to do more to boost employment, whereas when the BoE breaches its unequivocal legal mandate, you call for the mandate to change to validate the BoE’s misbehaviour?
19. July 2012 at 08:42
I presume L.S. is Ludwig Siegele the economist’s online business and finance editor.
19. July 2012 at 09:01
We’ll only be ending the charade that Democracy trumps Capitalism.
Democracy exists as long as it doesn’t step on capitalism’s toes.
The Economic vote trumps the Political vote.
And Dems / Left need to be reminded of this – when they cry uncle, we can go “forward.”
The A power (the top 1/3) has spoken. Never argue with the asshole of the body.
19. July 2012 at 09:02
@RebelEconomist are you being intentionally dense? Scott favors NGDP level targeting in both the US and in GB. However in the United States not only does the central bank not do NGDPLT, it also breaches its legal mandate, which Scott finds maddening: surely if they won’t embrace NGDPLT they would at least embrace their legal mandate. But there is no double standard. Scott would also applaud it if they broke their dual mandate to target NDGPLT (although I cannot imagine a real-life case where the dual mandate would diverge from NDGPLT).
19. July 2012 at 09:03
Mark, you are an ignorant fool, you should go in a bar somewhere and neck with MF. (Unless you ARE MF under a different handle LOL)
Scott, I know this is kind of off topic, but what would be the effect of a full 6.2% permanent employer side payroll tax cut in the US? First would it be easier to sell in Congress, as conservatives would be hard pressed to oppose a tax cut? Second, will it increase demand, or just supply-side productivity effects? And third, will it lower the NAIRU?
19. July 2012 at 09:20
Edward:
Mark, you are an ignorant fool, you should go in a bar somewhere and neck with MF. (Unless you ARE MF under a different handle LOL)
“Mark” ain’t me, but I definitely like the cut of his jib. Yes, I know, crazy that the rare person out there in internet land is right like me. This single blog has almost given the appearance that correct views are as rare as the white tiger, what with the massive group think and all. Oh, excuse me, I mean the devastating open minded criticisms being made by the 4.5% NGDPers against the 5% NGDPers.
19. July 2012 at 09:23
@JVM, it is obvious that Scott favours NGDP targeting always and everywhere, and is not selective about the arguments he makes in support of it.
In case you have not seen my comments here before, I do not think that the Fed is actually breaching its “legal” mandate (US law is not precise about the values of inflation, unemployment and long term interest rates that the Fed should be aiming for anyway). If I were Ben Bernanke, I would argue like the Bundesbank, and the BoE in its earlier more idealistic days of inflation targeting, that keeping inflation low and stable is the best contribution that a central bank can make to macroeconomic efficiency, and that macroeconomic efficiency promotes sustainable high employment. Current inflation and inflation expectations are not significantly below 2%.
19. July 2012 at 09:24
and Morgan,
though you aren’t as bad as MF, there are some things that are above party, and breaking public unions. Auctioning the unemployed is a good idea, except it won’t help with debt, which is the ultimate sticky price.
19. July 2012 at 09:28
Apparently if you miss your target by ~45%, “that’s not significant”…in the business world, that “insignificant” miss usually costs senior management their jobs.
19. July 2012 at 09:30
“And Dems / Left need to be reminded of this – when they cry uncle, we can go “forward.”
No one is close to crying uncle right now. Just ignore all the inconvient facts. Ignore that even the most conservative SJC since the 20s couldn’t strike down Obamacare.
Ignore that the more people learn about Mitt Romney the less they like him.
Why should we cry uncle when we have just recently had so much success-immigration, etc.
If we can last now, within a few years the country is going to look a lot more like Califronia or Ny
19. July 2012 at 09:33
The most common explanation for the Fed’s reticence is that it is afraid it will be accused of influencing the election – hence the minimalist response (extending twist through December) and the attempt to shift focus back on Congress. Bernanke is heavily influenced by political elements in wall street, and wall street wants obama out for the most part.
Also, oil is back at 93 – and the ag price spike due to the drought (can we agree that is a supply issue?) – means that headline inflation is not likely to keep its downward pace in the medium term. And since the evidence suggests the Fed is crudely targeting headline inflation with an asymmetric bias to just below 2%, that’s what I predict will happen.
19. July 2012 at 09:34
Edward that was a little out there but I like it! I think though MF is already spoken for, fellow Rothbardian Bob Roddis.
19. July 2012 at 09:36
On the other hand, Morgan, I think if Sununu keeps talking about pot back in Indonesia and Hannity talks about Bill Ayers, that will got Mitt over the hump.
19. July 2012 at 09:37
Yes Bill Ellis, the above was irony. I didn’t really mean it that this will help Romney
19. July 2012 at 09:42
@johnleemk, I hoped someone would make that argument, because it gives me the chance to show how desperately biased the arguments for more easing are. Not that I accept the 45% figure, but if that was correct, it would suggest that targeted inflation was running 0.9% below the Fed’s 2% target. Will you be calling for monetary policy tightening, let alone sackings at the Fed, if inflation hits 2.9%?
19. July 2012 at 09:45
Edward:
though you aren’t as bad as MF, there are some things that are above party, and breaking public unions. Auctioning the unemployed is a good idea,
Of course they’re good ideas! They’re all top down solutions! Nothing market created. It’s how central planning minds work.
19. July 2012 at 09:47
Mike Sax:
Edward that was a little out there but I like it! I think though MF is already spoken for, fellow Rothbardian Bob Roddis.
I’m not a Rothbardian.
19. July 2012 at 09:56
Apparently the ECD can do no more. According to Christian Noyer, a governor of the Central Bank of France (in an interview with Handelsblatt): “We are currently observing a failure of the transmission mechanism of monetary policy. From the markets’ perspective, the interest rate facing individual private banks depends on the funding costs of the state where they are domiciled and not on the ECB overnight interest rate… Hence the monetary policy transmission mechanism does not work.”
19. July 2012 at 10:46
RebelEconomist,
That would depend on whether the Fed is meeting the other side of its dual mandate. Assuming they insist on the dual inflation/unemployment targeting mandate (even though NGDPLT is superior) Congress should be asking Bernanke point blank:
1. Is the inflation rate where you want it to be, i.e. 2%?
2. Is the unemployment rate at the NAIRU?
Only if Bernanke can answer yes to both questions, to the satisfaction of the public, does he deserve applause. Right now Bernanke’s answers are:
1. No, but we’re thinking about getting it there
2. No, but we’re thinking about getting it there
(Anyway if he even answered “yes 8 to 10% unemployment is more or less the NAIRU” to #2, the Dems and the media would have probably lynched him.)
That the Dems would congratulate him for this and the GOP is worried that inflation is too high is insane. The GOP is evil, the Dems are morons, the public is screwed.
19. July 2012 at 10:53
Rebeleconomist, My position is identical in both countries:
1. I favor shifting to NGDP targeting in both countries.
2. Given the current mandate, I press them to come as close to NGDP targeting as they can.
BTW, Britain’s mandate is also vague.
asdasdasd, Thanks for the info.
Morgan, Spoken like a true fascist.
JVM, That’s right.
Edward, It might not be an easy sell, that’s a pretty big tax cut.
It might increase demand, it depends on how the Fed reacts.
It could lower the natural rate of unemployment, but at a cost of higher taxes and a higher natural rate in the future.
So monetary stimulus is still preferable.
Statsguy, You said;
“The most common explanation for the Fed’s reticence is that it is afraid it will be accused of influencing the election”
Ok, once again for the 100th time. The Fed almost always does what a consensus of economists thinks should be done. The Fed is currently doing what a consensus of economists thinks they should be doing. There’s nothing to explain, other than the the bizarre beliefs of the consensus of economists. That’s what I’m trying to change. When I started out in late 2008 almost no one agreed with me. Now a signficant number do, but far from a majority. One step at a time.
Rebeleconomist, The Fed has a dual mandate. You might not like it, but it is there. And Bernanke certainly doesn’t agree with your interpretation, as he keeps reiterating at every press conference. You are telling the Fed to focus on inflation and pay zero attention to unemployment. That’s not how they operate. (They didn’t even operate that way in the 1920s, for God’s sake.) They were cutting rates in 2007 when inflation was above 2% and rising.
19. July 2012 at 11:01
“The most common explanation for the Fed’s reticence is that it is afraid it will be accused of influencing the election”
Ok, once again for the 100th time. The Fed almost always does what a consensus of economists thinks should be done.
Those two statements are not mutually exclusive.
19. July 2012 at 12:47
Morgan,
I was about to call you “The Money Illusion’s” resident Mussolini, but then I saw Scott beat me to it…sorta. hahaha.
But seriously have you ever read “THE DOCTRINE OF FASCISM ” I think you might like a lot of it. It is really kinda utopian even though it rejects the notion of utopianism. Like all Philosophies that profess to be “The Answer” it has a fatal flaw. That flaw is always the same, they over estimate People.
What is the best form of government ? There are actually a lot of good answers to that in theory.
A Theocracy ? The actual rule of God has to be the best by definition.
Anarchy ? A Society that needed no laws because its people were awesome would be the best.
A Benevolent Dictator/ Philosopher King…In actual practice these are the best governments the world has ever known…At least in terms of advancement…But they are fleeting.
Think of the “THE DOCTRINE OF FASCISM ” as an attempt to lay out a blue print so that the Benevolent Dictator/ Philosopher King form of government can be maintained indefinitely.
Guess where it goes wrong ?
This is the best version on the web…
http://www.worldfuturefund.org/wffmaster/reading/germany/mussolini.htm
19. July 2012 at 13:02
johnleemk and Scott, I don’t dispute the Fed’s dual mandate(actually triple mandate, but they are doing spectacularly well on the third part, so we don’t hear much about that from Fed critics) mandate, but would question what employment objective it is reasonable to expect the Fed to achieve. Since we know that, for practical purposes, the effect of monetary policy on real activity is temporary, if the Fed is given an objective specified in terms of the level of employment, it can only be the maximum sustainable level of employment, and that of course is uncertain. In my view, the only intellectually honest form of any real activity objective for the Fed must be in terms of the RATE OF CHANGE of some real activity variable. Of course, that is not what politicians want to hear, so it would take a strong and articulate Fed chairman to put them in their place.
Scott, how is the BoE mandate vague?
19. July 2012 at 13:21
Mike,
I got it that time.
19. July 2012 at 15:21
Rebel, the BoE’s legal mandate only says “price stability”, leaving the specific definition of “price stability” up to HM Treasury. HM Treasury says price stability means a 2% CPI rate, but …
19. July 2012 at 17:14
Why vote when the levers of economic power are elsewhere?
Indeed.
You know, Reagan Treasury Secy Don Regan said Fed powers should be shifted to the Treasury. I now concur.
Why? Can voters really understand all this stuff? What the Fed does, along the federal deficit etc. It is not that voters are stupid—they have jobs to do. A very smart chemist would be puzzled after listening to Krugman, John Taylor and then Scott Sumner.
Voters understand the economy is getting better or worse, and are entitled to vote accordingly.
They should be able to vote in a new monetary policy, when they want. There should be accountability.
Moreover, the Fed-Ttreasury should be transparent, No more “man behind the curtain” aura. Fed meetings should be public.
I suspect we would get a better monetary policy. Right now the Fed is holding to institutional dogma and shibboleths (Theo-Monetarism), at the expense of the real economy. Would they dare if they could lose their jobs?
19. July 2012 at 17:14
BTW, the link to when Regan called to wipe out Fed independence.
http://news.google.com/newspapers?id=hUBVAAAAIBAJ&sjid=55QDAAAAIBAJ&pg=5524,8412282&hl=en
19. July 2012 at 19:28
For some individuals, it is not enough to have a political view–their secret lack of conviction in their own position causes them to demand to see that view enshrined as a law of the physical universe.
For this reason, some on the left argue that easy money without fiscal policy will actually just increase inequality or that easy money is a plot to destroy unions.
Similarly, the ECB’s own lack of conviction causes it to double down by wishing that “the real problem” was some underlying fiscal issue, and that the newly discovered Higgs Boson ensures that there is no other way forward, or something like that.
19. July 2012 at 23:12
@Britmouse, as you say, the LAW in the UK is clear. In particular, it gives lexicographic precedence to price stability in that the BoE may only pursue “objectives for growth and employment” “subject to” its price stability objective. This is consistent with the understanding that the central bank’s influence over real activity is temporary, with attempts to sustain it ending up disturbing price stability.
The quote you give comes from the correspondence between the chancellor and governor in which the government lays out its definition of price stability. And it could be argued that it refers to the specified 1% range around the target value of inflation (the Fed would be comfortably within such a range). Anyway, when UK inflation has been above the target for most of the time since 2006 (ie even BEFORE the financial crisis), and the BoE has had to write 14 letters to explain why it has breached the permissible range to the upside and not one for a downside breach, it stretches credulity to describe these as “occasional” breaches as a result of “shocks”!
19. July 2012 at 23:23
The problem, as I explained in a comment on The Economist, is that when people hear about central bank support they think of it as a discretionary Keynesian stimulus policy, as irresponsible coddling or indulgence, like what L.S. described in the article. They don’t understand that the only way for monetary policy to be neutral to the real economy is for it to follow a steady NGDP level path – any thing else seems like the central bank is stepping in to artificially correct for someone else’s mistakes, rather than rectifying mistakes of its own. Remember, monetary policy makes inflation, fiscal policy makes jobs. Naturally the popular imagination (including the popular imagination of economists) regards this as snake oil.
I’m pretty sure L.S. is Ludwig Siegele. Initials is the Economist’s “thing” (snobs).
20. July 2012 at 06:02
Scott,
this post reminds me of one of your previous posts, something along the lines of: The [U.S.] problem is 75% monetary and 50% structural, where you were arguing that if monetary policy were better than UE benefits would be reduced which in turn would improve growth as well (apologies for butchering as I don’t remember the exact argument). Can’t you actually switch the statement and say that in Europe the problem is 75% structural and 50% monetary, in that if labor market regulations are made more flexible and govts try to improve the composition of public spending THEN the ECB would react by implementing better monetary policy?
20. July 2012 at 14:52
Edward,
thanks I like you to, but this is wrongo….
“Auctioning the unemployed is a good idea, except it won’t help with debt, which is the ultimate sticky price.”
Debt evaporates without monetizing it.
Auctioning the unemployed GUTS the public sector…
Suddenly roads are fixed, grass is cut, old people are delivered meals, Section 8 costs plummet, AID in general goes down (all the 30M poor doing jobs for each other really cuts into AID needs), we can easily push the retirement age higher.. you just join the GI program.
No one bids on a 72 year old to dig post holes, not unless he markets himself that way.
—–
CRUCIAL to my world view is the FACT that if the public sector had made the same productivity gains as the private sector, we’d have a MUCH BETTER GOVT. and be paying MUCH LESS for it.
Public employees get $1.2T a year, that should be $500B with another $150B going to tech companies.
If we ran these savings from 1998, we’d have no debt.
We’ll get PLENTY of growth from GOV2.0 and plenty of growth from NGDPLT.
Debt isn’t a concern if you have have only 25% of the teachers, drones instead of 50% of the cops and soldier, and regulations are judged on cost efficiency.
20. July 2012 at 14:52
no dbet to speak of – like $7T less.
21. July 2012 at 10:41
[…] a recent post, Scott Sumner closes thus: PS. There’s another journalist endorsing NGDP targeting, someone with the initials […]
22. July 2012 at 07:41
Ben, Yes, when the GOP still favored growth.
Britmouse, Thanks for answering Rebeleconomist’s question.
Shane, Good point.
Saturos, Good point.
Federico, Yes, that’s certainly possible.
29. July 2012 at 22:14
[…] many think some beating is warranted: alas for such righteous monetary Calvinists, the policy of the beatings continuing until performance improves has long since degenerated into pointless and destructive monetary […]