The lesser of evils and the art of compromise

[Before starting, let me point out that this has been a challenging period for me, with record snow levels (40 inches in a week, and more coming.)  I’ve spent many hours out shoveling, which has slowed things down in other areas of my life.  I have a particularly difficult two family house with a long drive and nowhere to put the snow.  And I’m 59, an age where this stuff gets harder to do. I’m exhausted. Where are the unemployed?  Not around the Newton area.]

Many commenters ask me why I don’t compromise, and support a “helicopter drop,” which is usually meant as a metaphor for a combined fiscal and monetary stimulus.  One answer is that it may not work, as the Japanese showed between 1997 and 2012.  Another is that it’s wasteful, and that monetary stimulus alone is much more efficient.  But to give a better answer let me list government stabilization policies that might have been adopted in 2008, in order of preference:

1.  NGDPLT.

2.  A 4% inflation target

3.  Monetary stimulus combined with tax cuts that lower inflation (VAT, employer-side payroll taxes.)

4.  Monetary stimulus and more government spending.

5.  Hard money (i.e. tighter than the actual Fed policy post-2008.)

6.  Fiscal stimulus without monetary stimulus.

7.  Statist policies without monetary stimulus (i.e. Syriza policy.)

In criticizing policies 2 through 7, I may have fallen short in giving readers a sense of my views as to the lesser of evils.  If you pair any two items and convince me that they are the only two feasible alternatives, then this list tells you which one I will “support.”  But of course bloggers have to be careful, as when this information gets passed down the line, it gradually morphs from “Sumner considers X less bad than Y” to “Sumner supports X.”

Obviously NGDPLT is the market monetarist proposal.  Smarter Keynesians like Krugman, Rogoff and Blanchard tend to support item 2.  Christina Romer has advocated option 3 (and also supports NGDPLT.)  Most Keynesians also support option 4.  Some left-wing Keynesians are strangely hostile to monetary stimulus, and support option 6.  Some Austrians and older monetarists seem to support option 5, as they criticized Bernanke’s policies for being too expansionary.  Syriza would clearly like the ECB to do more, but that’s not Greek policy.  Greek governments can only affect monetary conditions in Greece by deciding to leave the eurozone.  Because Syriza wants to stay in, they are (de facto) adopting tight money.

Now let’s say you put a gun to my head and force me to “compromise” with Keynesians.  I won’t just compromise; I’ll completely cave, and accept their 4% inflation target.  I won’t try to talk them down to 3%.  It’s not my preferred policy, and it punishes saving and investment, but it’s better than 3 through 7.  So if you want compromise, if you want to lock Krugman and me in a room until we agree on something, then 4% inflation is the policy that will come out of that room.  It’s high enough to keep us above the zero bound, and Krugman’s always insisted that fiscal stimulus is only needed at zero interest rates.  (Of course he also favors bigger government for other reasons, having nothing to do with stabilization policy.)

Why is the list constructed this way?

2.  There is relatively little cost to anticipated inflation rates that are fairly low (and 4% was consider low under Volcker.) The main problem is that inflation raises taxes on capital.  But in the past the federal government has offset this with tax cuts on capital.  Then when inflation fell to low levels in recent years, taxes on capital were raised again.  If we go to 4% inflation (again, not my preferred policy) we could cut taxes on capital to offset any negative effects on growth.

3.  Option three is also not very costly, but I have doubts about its effectiveness, and about the ability of Congress to move tax rates around in a timely and effective manner. Better to avoid the zero bound entirely.

4.  Option 4 is far inferior to 3, as it contemplates government spending that does not meet classical cost/benefit test, i.e. that can only be justified assuming a stimulative effect.  In contrast, under option 2 there is never any need for infrastructure programs to put people back to work, as you are never at the zero bound.

5.  Option 5 makes the demand shock even worse, and the recession even deeper.

6.  Option 6 combines a deep recession and wasteful spending programs that result in higher future (distortionary) taxes.

7.  Greece under Syriza — ’nuff said.

To summarize, if forced to compromise, 4% inflation is the Keynesian program I accept, not helicopter drops.  If I criticize Paul Krugman more than old monetarists, it’s because I take his ideas more seriously.  Recently I have also avoided saying much about Marxists, MMTers, internet Austrians, etc.; that doesn’t mean I do not oppose their policies even more strongly than I oppose helicopter drops.

PS.  OK, maybe fiscal stimulus in the snow removal area would be justified.  🙂

 


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78 Responses to “The lesser of evils and the art of compromise”

  1. Gravatar of Brett Brett
    5. February 2015 at 08:12

    Sorry to hear about all the shoveling. We seem to be getting the opposite weather out here in the west- it’s been unseasonably warm where I live since about three weeks into January.

    I find it bizarre that anyone would openly espouse targeting inflation rather than targeting NGDP (which will give you higher inflation as a result, but maybe less than you think if your economy can add capacity fast).

  2. Gravatar of Benoit Essiambre Benoit Essiambre
    5. February 2015 at 08:20

    No mention of PLT? Also you mention 4% IT but no rate of increase on NGDPLT. Does that mean the rate matters less with NGDPLT?

  3. Gravatar of ssumner ssumner
    5. February 2015 at 08:22

    Brett, Yes, NGDP targeting is much better than IT.

    Benoit, PLT is between one and two. Yes, the rate matters less for level targeting.

  4. Gravatar of TallDave TallDave
    5. February 2015 at 08:53

    Recently I have also avoided saying much about Marxists, MMTers, internet Austrians, etc

    At this point it’s hardly necessary. For the record, market monetarists also oppose adopting Monopoly money as legal tender.

  5. Gravatar of TallDave TallDave
    5. February 2015 at 08:55

    Also, for God’s sake Scott, either get a snowblower or better yet hire a snow removal service. If not yourself, think of market monetarism.

  6. Gravatar of Jim S. Jim S.
    5. February 2015 at 08:56

    I would like to see a book jointly written by a market monetarist like you and a Keynesian like Wern-Lewis or Brad DeLong. Alternate chapters laying out your view on key macro issues, points where you find common ground, and points where you clearly recommend different approaches. The target audience would be the lay reader. Jimmy Carter’s and George H. W. Bush’s national security advisors (Brzezinski and Scowcroft) wrote a book like that on foreign policy in 2009. It would probably sharpen your arguments but the key benefit would be to try to eliminate bad ideas from the public discourse and focus on steps that have wider support by most macro economists. It would be good to nail policy actions that both key schools find unhelpful to the floor and to elevate policy actions that both key schools find useful or at least harmless.

  7. Gravatar of ChargerCarl ChargerCarl
    5. February 2015 at 09:06

    Scott, regarding option 4, doesn’t pretty much anything pass the cost/benefit test given how low interest rates are? I assume the government isn’t going to be drowning puppies but instead investing in infrastructure of some sort.

  8. Gravatar of Britonomist Britonomist
    5. February 2015 at 09:06

    You keep implying that helicopter drops and 4% inflation or NGDPLT are somehow mutually exclusive. I argue the opposite in that they are complimentary, in fact I’d go further and argue that helicopter drops may even be necessary for such a target when at the ZLB, or at least it would have been in 2009.

    Again, advocating a higher inflation target or NGDP target doesn’t address those who critique monetary policy at the ZLB due to a lack of transmission mechanism. As I said in a previous post:

    “And you can’t keep comparing targets to weapons, those are apples and oranges.

    Suppose the Fed lost the ability to do QE, all it could do was change the federal funds rate, and only to 0 or above. Would you say “no problem, just implement NGDP targeting”? Would the fed have enough ammunition just with the federal funds rate?”

    Also

    “It’s not my preferred policy, and it punishes saving and investment, but it’s better than 3 through 7. So if you want compromise, if you want to lock Krugman and me in a room until we agree on something, then 4% inflation is the policy that will come out of that room. ”

    When I was talking about compromise before, it had nothing to do with this kind of compromise. I’m talking about compromising with Keynesians and others that are skeptical of the monetary transmission mechanism of current policy options of the Fed when at the ZLB, from traditional Keynesians like Simon Wren-Lewis, to monetary realists and various city financiers. These people may otherwise support an NGDPLT or higher inflation target, so even if you agree with them on that, you wont get anywhere unless you can prove to them the Fed has the power to do that. They will never be convinced by the ability of the Fed to do unlimited QE, they will only be convinced by helicopter drops or something similar and more direct. Honestly I think Krugman is in the same camp, I think Krugman is skeptical of using QE alone but just thinks “it can’t hurt, may as well try”, he has said so many times.

  9. Gravatar of ChargerCarl ChargerCarl
    5. February 2015 at 09:09

    ok, dream scenario for me: the government sends billions in transportation funds to cities in exchange for liberalizing zoning laws and increasing density.

    Would never happen, but I can dream.

  10. Gravatar of Cornflour Cornflour
    5. February 2015 at 09:14

    I’m 62. Where I live, we get about twenty feet of snow every winter. I could never shovel it all. That would be deadly torture. Instead, I push the snow with a Yooper Scooper. Here’s a link to ordering one http://www.silverbear.biz/the.store

  11. Gravatar of SG SG
    5. February 2015 at 09:19

    Scott,

    Cornflour is on the right track. Here’s my snow pusher of choice (I live outside Boston too, so I feel your pain, but this thing is a godsend)

    http://www.amazon.com/gp/product/B000JLK0SM?tag=thesweethome-20&linkCode=as2&creative=374929&camp=211189

  12. Gravatar of Kenneth Duda Kenneth Duda
    5. February 2015 at 09:26

    Britonomist: I agree completely. Keynesians and Market Monetarists should get together and agree that the best practical approach is two things:

    1. NGDPLT

    2. Fiscal stimulus when NGDP is under target

    Market monetarists argue that NGDP will never be under target with NGDPLT. I agree, but I recognize it’s unproven. If Market Monetarists are right, then we would never need fiscal stimulus under the regime above. If Keynesians are right, then they get what they want. This is a win-win policy approach that could unite the sensible economists of the world, ending the needless bickering between Market Monetarists and Keynesians as Noah Smith describes so nicely here:

    http://www.bloombergview.com/articles/2015-02-02/keynesians-market-monetarists-blog-for-economic-truth

    Noah and Britonomist are right. This is an empirical question that we will never settle with models and logical arguments. Let’s unite with Krugman, DeLong and Wren-Lewis and make this happen.

    -Ken

    Kenneth Duda
    Menlo Park, CA

  13. Gravatar of Britonomist Britonomist
    5. February 2015 at 09:31

    Thank you Kenneth! Nicely put!

  14. Gravatar of bill bill
    5. February 2015 at 09:41

    Good post. Maybe slightly better than a 4% inflation target is 4% price level targeting.

    I’m not as up on the verbiage, but I always thought that a helicopter drop was the monetary authority printing some money and giving it to the people for free. (method of giving not yet identified). The difference between that and QE is that since the money was given away, the Fed had no way to buy it back in like it can do with all the bonds purchased in QE. This sort of helicopter drop would be done in the frame work of the Fed trying to meet its “target” (whether that target was 2% inflation, 4% inflation or preferably staying on a 5% NGDPLT path). Under these conditions, I venture to guess that a very small helicopter drop would be required compared to QE bond purchases.

  15. Gravatar of Doug M Doug M
    5. February 2015 at 09:49

    Fiscal stimulus without monetary stimulus…

    Every dollar spent must be borrowed, taxed or imported.
    A dollar spent by the government is a dollar not spent elsewhere… GDP impact is at best 0.

    Fiscal stimulus can only work when accompanied by monetary stimulus.

    Since GDP is a measure of the value of goods and services produced, if the government spends those stimulus dollars on “make work” projects with little value other than circulating money… Keynes idea of burying treasure so that people can be employed both burying it and looking for it…is a net negative.

  16. Gravatar of Kenneth Duda Kenneth Duda
    5. February 2015 at 09:57

    > A dollar spent by the government is a dollar not spent
    > elsewhere… GDP impact is at best 0.

    No Doug M, that is not true. There are plenty of wealthy individuals and corporations and sovereign wealth funds and the like sitting on tons of dollars; check out the size of bank reserves. They aren’t going to spend that money any time soon. If the government taxes (confiscates) or borrows that money and spends it, the multiplier is at least 1.

    Of course, given full Ricardian equivalence, you are … still wrong. See http://krugman.blogs.nytimes.com/2014/11/15/the-unwisdom-of-crowding-out-wonkish/. Even in crazy representative agent models, tax-and-spend or borrow-and-spend increases NGDP in the short run. So most people making your argument are wrong even under the assumptions of their own model. It’s quite amazing how the desire to believe something can overwhelm both logic and evidence.

    -Ken

    Kenneth Duda
    Menlo Park, CA

  17. Gravatar of Nick Nick
    5. February 2015 at 10:13

    Bill,
    This is how I understand the argument about helicopter drops:
    You say the method of giving out the money is unknown in your version of the helicopter drop. Let’s say the method was congress passing a bill authorizing him to take some military equipment and fly around the country literally dropping money on people. We’ve already basically made it a combined fiscal / monetary stim. Congress could choose to put it on the books and instruct the fed to buy and then forgive (monetize) the debt issued. Or it could say, ‘hey we won’t even bother to keep track, it’s on you’. There’s no real difference.
    Or it could use the infrastructure it already has to directly pump out the cash (say send everyone’s taxes back, or simply having the postal service deliver checks to people) and have the fed buy and destroy the extra debt.
    Now for any amount of debt buying and destroying there is a greater amount of debt buying and holding one could do that would have the same effect. You could let the fiscal authority borrow $5 and destroy the note or you could let the fiscal authority borrow $500000 (or whatever) at a very slightly negative interest rate. Seems like the same thing.
    So then the question becomes by ‘helicopter drop’ do you mean the Fed doing it without any new authorization. I’d imagine the method they chose to go about this would prove controversial.

  18. Gravatar of TallDave TallDave
    5. February 2015 at 10:20

    doesn’t pretty much anything pass the cost/benefit test given how low interest rates are?

    If the government taxes (confiscates) or borrows that money and spends it, the multiplier is at least 1.

    I always wonder why people don’t see the really, really obvious flaw in these arguments, which is that inefficient spending destroys value. Yes, even when it increases NGDP. The government could buy a million new cars and have them crushed and sent to recyclers, and this would increase NGDP and employment, but that hardly makes it a good idea.

  19. Gravatar of Britonomist Britonomist
    5. February 2015 at 10:25

    Also, what if we go more extreme. What if the Fed just credits everyone’s bank account in the country with cash, bypassing the government. I know this is radical, but what are the theoretical implications of this? A lot of DSGE models just treat a monetary expansion as if this is what is happening anyway.

  20. Gravatar of Don Geddis Don Geddis
    5. February 2015 at 10:42

    @Bill: “a helicopter drop was the monetary authority printing some money and giving it to the people for free
    @Britonomist: “What if the Fed just credits everyone’s bank account in the country with cash… what are the theoretical implications of this?

    It sounds simple, for the Fed to just give ordinary people new cash. But the consequences are a little harder to work through.

    It’s generally easiest to understand as a combination of monetary (money supply) and fiscal (spending) policy. Think of it as: (1) the fiscal government decides to borrow more money by issuing new bonds; (2) the fiscal government then spends that money by sending checks to citizens; (3) the central bank then expands the money supply by purchasing additional Treasuries on the open market.

    It sounds more complicated with the three steps, but it has the same net effect, right? Yet it is much easier to analyze the independent macro effects of: (1) additional fiscal borrowing; (2) additional fiscal spending; (3) additional monetary base expansion.

    Note especially that the effect of #3, depends critically on expectations of the central bank’s future path of the monetary base.

  21. Gravatar of Britonomist Britonomist
    5. February 2015 at 10:51

    “It sounds more complicated with the three steps, but it has the same net effect, right? ”

    Probably, but fiscal stimulus skeptics can disagree for various reasons (e.g. fiscal stimulus might be inefficient spending, crony, not evenly dispersed etc..) while monetarists might be skeptical of the permanence of these monetary injections, therefore it may not be a true helicopter drop as it may not be fully analogous to Friedman’s analogy.

    This is why I want to reduce the noise to a very simple scenario, immediate crediting of people’s bank accounts. If we can establish the effectiveness or ineffectiveness of this, then we can move on to how helicopter drops might work in reality.

  22. Gravatar of LK Beland LK Beland
    5. February 2015 at 10:53

    One form of the Keynesian argument is that ZLB monetary policy *can* somewhat increase NGDP growth and growth expectations, but that fiscal policy could do this with less lag and variability (basically, they claim that the multiplier for fiscal policy is well defined and that it does not change rapidly relative to other macroeconomic variables, but that the money velocity is not well defined at the ZBL and that it changes rapidly relative to other macroeconomic variables).

    Well functioning NGDP prediction markets could help us figure out if this is true or false in the context of natural experiments. Personally, I don’t believe that this Keynesian statement is true, but that is besides the point; better data concerning market views on the effectiveness of fiscal and monetary policy is crucially missing.

  23. Gravatar of Doug M Doug M
    5. February 2015 at 10:55

    “There are plenty of wealthy individuals and corporations and sovereign wealth funds and the like sitting on tons of dollars.”

    No they don’t. Wealthy individuals and Sovereign wealth funds hold securities. There is very little money in the US that is not invested. The largest pocket un-invested cash is held by organized crime.

  24. Gravatar of TallDave TallDave
    5. February 2015 at 10:59

    Nick/Brit — Doesn’t really matter whether Fed or Treasury does the sending, because the Fed is a government creation, thus the Fed can only be as credible as the government (many CBs are nominally independent to insulate them from politics precisely because of this problem) and money printed is thus a promise to either inflate or tax.

    Better to just let the government send out money to the poor (as it does now), and have the Fed buy Treasuries to meet its inflation target. As long as the government can credibly promise to pay back the Treasuries, the Fed can make a credible inflation target, and the interest is paid back to the government, and the Fed then has assets to reinforce its ability to control inflation (it can always sell them — if the gov’t is credible!).

  25. Gravatar of Britonomist Britonomist
    5. February 2015 at 11:03

    Doug, economics essentially shows that if the economy is not at full employment, someone(s) somewhere are spending less than they would be, the entire point of a demand shock caused recession is that it’s deficient demand, deficient spending. The government is simply boosting AD by boosting G, making up for the shortfall in demand (in this case caused by deleveraging by consumers or general irrational hysteria). Fiscal stimulus is not borrowing, fiscal stimulus is spending, borrowing is a symptom, but it’s not clear that expectations of future fiscal consolidation fully offset the spending. However, combined monetary and fiscal stimulus is certainly much better, since fears of fiscal consolidation are relieved.

  26. Gravatar of J Mann J Mann
    5. February 2015 at 11:04

    TallDave, I think ChargerCarl means policies on the table – specifically, building roads or mass transit.

    ChargerCarl, I don’t think you’re right.

    1) If we spend some money now, even when borrowed at 0% interest rates, we are ultimately committing to tax somebody in the future to pay for that spending.

    2) Given that, there are basically two arguments in favor of the spending. (a) That the spending will increase economic growth enough to create enough increased future tax revenue to pay off the money we borrowed. (The spending Laffer curve, if you will) or (b) this is so important that we totally would raise taxes now, except we’re afraid of austerity effects on the economy, but we’ll totally be willing to raise taxes now.

    3) I don’t think 0% interest really informs those questions. My personal bias is that if you pushed free money out to the states and cities, they would spend in on a lot of projects they believed had a postive NPV, but it’s really easy to convince yourself that a project has a positive NPV, and it’s a much longer leap to get to a Laffer-positive project.

  27. Gravatar of TallDave TallDave
    5. February 2015 at 11:13

    J Mann — that doesn’t really change anything, though. Building roads and mass transit can certainly be wasteful policies.

    Too often people look at some physical product and say “well clearly building that has created value.” But that’s only true if the product’s utility is greater than its cost of production — quite often, leaving the cash sitting in a pile was a better use of it. It’s quite easy to produce things and destroy value at the same time.

  28. Gravatar of TallDave TallDave
    5. February 2015 at 11:26

    Since 1970, the number of workers needed to operate America’s public transit systems has increased by 180 percent while the inflation-adjusted cost of operating buses, light rail, and heavy rail (the only modes whose costs are known back to 1970) increased by 195 percent. Yet ridership on those modes increased by only 32 percent. Each transit worker produced 53,115 transit trips in 1970, but only 26,314 trips by all modes in 2008. The real cost per rider grew by 124 percent, while subsidies (fares minus operating costs) grew by more than 8 times. Though capital cost data prior to 1992 are sketchy, capital costs also grew tremendously, almost certainly by more than operating costs. By any measure, then, transit productivity has declined more than 50 percent. “It’s uncommon to find such a rapid productivity decline in any industry,” noted the late University of California economist Charles Lave.

    I think Keynesians forget sometimes we didn’t all become Communists. Government spending must promote (inefficiently) some public good that private interests do not, it cannot serve as a substitute for “insufficient” private spending in the economy generally. Better to just send people money directly, and let them spend it according to their own notions of utility and value.

  29. Gravatar of ThomasH ThomasH
    5. February 2015 at 11:38

    @ Scott

    “tax cuts that lower inflation (VAT, employer-side payroll taxes.)”

    I too favor cuts in payroll taxes but because they are regressive compared to other ways of paying for pensions and health insurance. I do not understand how cutting payroll taxes would lower inflation. Is it because with an NGDP monetary target, removing this distortion in the labor market would raise real income and so reduce the inflation component of nominal GDP?

    What about 2a) a 2% inflation target, but actually hitting it, not letting average inflation drift below 2% with no commitment to catch-up inflation? What good would a 4% target be if the Fed is not willing to meet it?

    Isn’t more government spending (on activities whose discounted present value of benefits minus costs exceed the real borrowing rate) a part of optimal policy in #1-#3 as well, not just #4?

  30. Gravatar of ThomasH ThomasH
    5. February 2015 at 11:57

    @Kenneth Duda

    “Fiscal stimulus” will happen if governments simply apply conventional cost-benefit analysis to activities during recession (= NGDP is below target) just as “fiscal contraction” will result from the same decision rules during booms. Where Keynesians (and I think Market Monetarians) agree (though Market Monetarians in soto voce) and disagree with “Mediamacro” in SWL’s term, is in opposition to “austerity” — spending less during a recession in violation of the results of cost benefit analysis because of the budget deficit has increased.

  31. Gravatar of Doug M Doug M
    5. February 2015 at 12:18

    “Doug, economics essentially shows that if the economy is not at full employment, someone(s) somewhere are spending less than they would be, the entire point of a demand shock caused recession is that it’s deficient demand, deficient spending.”

    I would say that demand is effectively infinite. There is not “insufficient demand.” There is insufficient demand at a certain price! At that price level supply is outpacing demand and we have an inefficiency. If the government is going to act as a shock-absorber and suck up the surplus, then they are institutionalizing the problem and preventing the price from finding its market clearing level.

    They are buying-down unemployment today at the cost of lower GDP growth in the future.

  32. Gravatar of ThomasH ThomasH
    5. February 2015 at 12:27

    @TallDave.

    Buying cars in period 0 and crushing them in period 1 would not have a positive net present value.

  33. Gravatar of TallDave TallDave
    5. February 2015 at 12:37

    ThomasH: Of course not, the NPV is irrelevant to the NGDP. Buying the cars, producing the cars, and crushing the cars are all economic activities.

  34. Gravatar of TallDave TallDave
    5. February 2015 at 12:55

    Also, government spending isn’t governed by NPV anyway; government spending is intended to increase utility, not provide ROI. The relevant metric is cost per util, which is of course wonderfully ineffable.

  35. Gravatar of ssumner ssumner
    5. February 2015 at 13:25

    TallDave, I tried a snow removal service, and found them to be almost useless (as do my neighbors.)

    Where would I blow the snow too? The only open space next to my drive is my neighbor’s driveway.

    ChargerCarl, You have no idea how incompetent the government can be. Think about the high speed rail proposals out there. Orlando to Tampa? But yes, whatever passes the cost/benefit test should be done.

    Britonomist. The whole point of the 4% inflation target is to avoid the zero bound. But even at the zero bound, why wouldn’t unlimited QE be better than a helicopter drop?

    You said:

    “They will never be convinced by the ability of the Fed to do unlimited QE”

    And they think Congress will do helicopter drops?

    You said:

    “Honestly I think Krugman is in the same camp”

    I assure you that Krugman is not in the same camp as you. He proposed 4% inflation targeting precisely so that the Congress would not have to do fiscal stimulus.

    Thanks Cornflour.

    Kenneth, You said:

    “Market monetarists argue that NGDP will never be under target with NGDPLT.”

    Not quite, I’ve argued for targeting NGDP futures prices. I’ve argued that expected future NGDP would always be on target, in that sort of monetary regime. But actual NGDP can bounce around from quarter to quarter as a result of random shocks. But those short term fluctuations have very little effect on the unemployment rate (as we saw in Japan in 2014), and hence don’t call for fiscal stimulus.

    Under my preferred regime NGDP expectations would always be on target, and hence there’s be no need for fiscal stimulus. Indeed even under the Taylor rule regime of 1984-2007 there was no need for fiscal stimulus, and we can do better than that regime.

    Instead of focusing on what to do at the zero bound, we need to focus on staying away from the zero bound. In addition, it seems unlikely that fiscal stimulus is effective even at the zero bound. Recall the severe 2013 austerity did not have the predicted effect. How can economists in good conscience suggest the government spend hundreds of billions (if not trillions) of dollars on programs that have not been shown to be effective?

    Bill, You said:

    “Good post. Maybe slightly better than a 4% inflation target is 4% price level targeting.”

    Even better would be a 3% PLT.

    Doug and Kenneth, The effect of fiscal stimulus depends entirely on the monetary reaction function. Note that economists don’t even agree as to what it means for the Fed to “do nothing.” Did the Fed “do nothing” from August 2007 to May 2008 when the base was kept constant, but interest rates fell from 5% to 2%?

    Britonomist, You asked:

    “What if the Fed just credits everyone’s bank account in the country with cash, bypassing the government.”

    This leads to higher future taxes, and slows growth in the economy.

    LK, Again, we need to avoid the zero bound, and that means we need to demand the Fed institute a regime that avoids the zero bound. By the time fiscal policy comes to the rescue, it’s too late, you already have a macroeconomic disaster.

  36. Gravatar of Britonomist Britonomist
    5. February 2015 at 13:41

    “And they think Congress will do helicopter drops?”

    This isn’t about political inability, this is about real physical inability. Many (most?) Keynesians believe that the ability of QE to boost AD is very limited, they don’t believe that the effect of helicopter drops in AD is limited however. Whether it’s politically feasible is another matter.

    “This leads to higher future taxes, and slows growth in the economy.”

    Please explain how this is any different at all from QE or any other monetary tools? And again please please please don’t assume that anyone is advocating helicopter drops /as an alternative/ to NGDP or higher inflation targeting, they’re advocating it as a supplementary or even required policy to achieve those measures. I’m asking about these kind of helicopter drops /combined/ with a well articulated target from the Fed.

  37. Gravatar of ssumner ssumner
    5. February 2015 at 13:58

    Britonomist, So the worst that can happen is that the country doing the QE owns the rest of the world, and AD still doesn’t rise?

    Look, at some point there is no reasoning with people. If someone really believes unlimited QE would not boost AD, I don’t know how I could meet them halfway.

    There is not a shred of evidence that fiat money central banks are unable to hit inflation targets, gold price targets, forex targets, NGDP targets, M2 targets, or any other nominal target they choose to hit. If there was a shred of evidence then I’d take the doubters seriously. But instead when I read their arguments I come across one inaccuracy after another. They seem to think that central banks have tried and failed. But they never tried.

  38. Gravatar of Britonomist Britonomist
    5. February 2015 at 14:21

    I don’t think anyone is saying that QE has absolutely no effect whatsoever, just that it’s mild and inefficient. That it takes 5 trillion of QE to produce the same effect on AD as 20 million of direct spending would. Or that it relies on propping up asset bubbles or stock market euphoria etc etc… They also might argue (seemingly correctly) that under current conditions increasing the monetary base has no reason to increase broad money and the amount of credit extended.

    “There is not a shred of evidence that fiat money central banks are unable to hit inflation targets, gold price targets, forex targets, NGDP targets, M2 targets, or any other nominal target they choose to hit. If there was a shred of evidence then I’d take the doubters seriously. But instead when I read their arguments I come across one inaccuracy after another. They seem to think that central banks have tried and failed. But they never tried.”

    To me, it’s not about you being convinced, it’s about you convincing others. You will struggle to convince non market-monetarists to support the Fed adopting an NGDPLT if you don’t consider adding some kind of ‘helicopter drop’ (i.e. some method to directly increase broad money) as part of the arsenal.

  39. Gravatar of Don Geddis Don Geddis
    5. February 2015 at 14:41

    @Doug M: “I would say that demand is effectively infinite. There is not “insufficient demand.” There is insufficient demand at a certain price!

    That’s what the word “demand” means, in a macro discussion. The nominal amount of cash chasing after limited goods. Of course, everyone knows that, if the price of goods were zero, people would be essentially insatiable at “demanding” them. That’s the whole point of economics: how do you allocate scarce resources, when not everybody can have what they “want”?

    So when we complain about a macro shock due to “insufficient demand”, what that means is that there is not enough cash bidding for the current set of goods, at the current prices. If prices (including wages and debt) are sticky, then this imbalance is easiest to clear by providing the economy with additional cash.

  40. Gravatar of collin collin
    5. February 2015 at 15:02

    4% Inflation Rate?

    What if 4% inflation rate is impossible for the developed economies? Japan has not seen it for a generation and Europe has hit the deflation walls with even corporate bonds dropping below 0%! The US is still managing core at 1% but we are can’t even reach 2% at this point.

    What factors causing such low inflation? Rich nation baby bust, Chindia labor glut, an increase in the productivity of capital. So I don’t think 4% is a good goal because the developed worlds can’t reach it.

  41. Gravatar of CMA CMA
    5. February 2015 at 15:09

    SSumner

    Heli’s can be pure monetary policy if performed by the central bank with central bank issued emoney.

    “One answer is that it may not work, as the Japanese showed between 1997 and 2012.”

    That is in large part becuase the fiscal arm has to borrow to make heli’s happen. If the Cb does heli’s of emoney then fine.

    I dont see how heli’s are wasteful. Geerally people use their money usefully especially if they have low incomes or are unemployed.

  42. Gravatar of benjamin cole benjamin cole
    5. February 2015 at 15:14

    Ken Duda is right; Market Monetarists should try to form alliances and do a lot of PR. Perhaps we need to emphasize that our goal is greater prosperity, meaning higher profits and more jobs.

    Love NGDPLT; still wonder why tax monetization is not a good path there. FICA tax holiday financed by printing money (QE).

  43. Gravatar of bill bill
    5. February 2015 at 15:25

    In the end, Scott is right (no surprise). The central banks haven’t tried.

  44. Gravatar of Charlie Jamieson Charlie Jamieson
    5. February 2015 at 15:44

    The central bank has a limited ability to do helicopter drops. It can buy assets, but so far has only purchased treasuries (which is just an asset swap) and MBS (which effectively monetized junk bonds.) Mostly QE just inflates asset prices temporarily.
    The central bank can make it easy for banks to lend, but can’t really induce people to borrow if they don’t believe they will have adequate income.
    Possibly a brave and determined Fed chief could buy credit card debt or student loan debt. A student freed from a 50k loan could put those interest payments to better use, and would feel more comfortable borrowing other money for a home or business.
    Negative interest rates might lure borrowers to the bank. What if I could borrow 100k and see the principal loan amount fall every year — that would spur loan creation.
    What about offering negative interest rates to qualified people — let’s say married, college educated, citizens. Gets money to productive people, and encourages socially helpful behavior.
    As for more realistic ideas — a real helicopter drop would require large deficits, backed if necessary by a central bank willing to buy bonds if there weren’t enough buyers. I think there are buyers out there.
    The notion that this would make taxes higher in the future is a misunderstanding of what a T-bond is. It doesn’t need to be ‘paid back’ it’s actually just ‘money’ as we usually define it.
    Two caveats to massive deficit spending: a) the legislature would have to spend the money in a productive way, and the central bank would have to step in to stop inflation if it developed. Could the legislature do that? And does a central bank really have the power to stop inflation?

  45. Gravatar of Edward Edward
    5. February 2015 at 15:46

    For purely distributional purposes, helicopter drops are more “just” (if they are mailed to all citizens) than QE which is so easily tarred as a big bank giveaway.

    Also Scott the same expectations logic to increased in the monetary base can be applied to helicopter drops. A temporary helicopter drop could be hoarded, but a permanent( at least until the income target is reached) and ongoing series of drops would achieve liftoff

  46. Gravatar of Britonomist Britonomist
    5. February 2015 at 15:46

    ” MBS (which effectively monetized junk bonds.)”

    I don’t think the MBS that the Fed buys is of low quality, at least not the MBS it buys now, last I checked it’s of the lowest risk possible.

  47. Gravatar of Major.Freedom Major.Freedom
    5. February 2015 at 16:29

    Why does this “art of compromise” include violators of property rights being able to continue to do so while those who want to defend and respect them get zero of what they want?

    That isn’t compromise. That’s just positive advocacy of one socialist activity or another.

  48. Gravatar of Doug M Doug M
    5. February 2015 at 16:32

    Don Geddis,
    “If prices (including wages and debt) are sticky, then this imbalance is easiest to clear by providing the economy with additional cash.”

    I agree…additional cash will move the price price level until the market clears.

    My original point was that fiscal stimulus without monetary stimulus won’t accomplish anything beneficial and could be negative.

    The argument for fiscal stimulus ultimately hinges on the idea that central bank liquidity will not find its way into the economy without a government pressure to push it along. Sometimes this is phrased as “you can’t push on a string”, or “monetary policy is ineffective at the zero bound.” If you are a monetarist, this is Bullshytte.

    But, fiscal stimulus with no monetary stimulus, as I said, does nothing good, and could be bad.

    And, if you are an Austrian, neither fiscal stimulus nor monetary stimulus do anything beneficial, as both are interfering with the market finding its own price level.

  49. Gravatar of Don Geddis Don Geddis
    5. February 2015 at 18:23

    @Doug M: “if you are an Austrian, [both] fiscal stimulus [and] monetary stimulus … are interfering with the market finding its own price level.

    Yeah, I’ve never gotten that. What is the “market price level” of the unit of account? Especially with a fiat currency. The value of a dollar (and the supply of dollars) is completely arbitrary. Most (self-described) Austrians seem to confuse the medium of exchange with the unit of account, but the important macro consequences (because of sticky wages and debts) come from the latter, not the former.

  50. Gravatar of Major.Freedom Major.Freedom
    5. February 2015 at 20:37

    Doug M:

    “if you are an Austrian, [both] fiscal stimulus [and] monetary stimulus … are interfering with the market finding its own price level.”

    Fiscal intervention and monetary intervention either do or do not interfere with the market process. It does not depend on what name you give people.

    ————-

    Don:

    “Yeah, I’ve never gotten that. What is the “market price level” of the unit of account?”

    Money is the commodity that primarily serves as a medium of exchange. The use of money as a unit of account is secondary

    The concept of price is an exchange ratio. When we talk about the price of a good, or the price of a dollar, we are taking about what can be exchanged for that goods or that dollar.

    If the price of a slice of pizza is $3.50, then that is the same thing as saying the price of $3.50 is a slice of pizza.

    Much confusion arises when you view money primarily as a unit of account. You can disagree with Sumner on this point, because he’s wrong about it. You have to get to the fundamentals. Unit of account? How are accounts created? If I am going to create an account of say dollars, then I must go out and acquire dollars, in the market it is by way of exchanges.

    Doug M is referring to a theory that does not ground the argument “fiscal and monetary intervention interferes with the market” on “price levels”. It is not by altering price levels that interference consists.

    “Especially with a fiat currency. The value of a dollar (and the supply of dollars) is completely arbitrary.”

    No it isn’t. It is quite deliberate and planned. The primary aim to backstop “member banks” to engage in continuous credit expansion without withdrawal requests from one bank to another resulting in individual member bank insolvency, and to provide the Treasury with a supply of spendable funds that are in excess of what the Treasury otherwise could have borrowed and taxed without it.

    The tangible value of dollars is the supply of goods and services such dollars can buy.

    “Most (self-described) Austrians seem to confuse the medium of exchange with the unit of account, but the important macro consequences (because of sticky wages and debts) come from the latter, not the former.”

    There is no confusion. Wage and debts arise from exchanges. The “important macro consequence” of sticky wages and prices does not depend on how we understand money to be. Money is X and nothing else. If you understand mondy, falsely, as primarily a medium of account, that does not change the “importance” of the consequences of people not raising or lowering wage rates.

    What you are doing is going backwards. You are starting with humans stupidity, then you go to sticky wages, then NGDPLT, and then to communicate this to your intended victims, you feel obligated to emphasize a secondary derivative aspect of money in order to make such “consequences” seem more important than they really are.

    The reason why dollars and not copper or iron or cheese or wine are used a unit of account, is because dollars are used as medium of exchange.

    Money is primarily a medium of exchange, period. You are confused on this because your intention is not the truth, but how to make NGDPLT politically palatable.

  51. Gravatar of Ralph Musgrave Ralph Musgrave
    5. February 2015 at 21:44

    The idea that NGDPLT or 4% inflation target (1 & 2 above) are alternatives to heli drops is total nonsense. The first two are TARGETS, while heli drop is a method of reaching a target.

    Let me explain. Cars, ships and planes are modes of transport, while if you live in New York, then Washington DC, San Francisco and other cities are potential targets or destinations for your journey.

  52. Gravatar of Prakash Prakash
    6. February 2015 at 00:03

    The most important thing is that market monetarists have to favour RULES.

    Declare your target explicitly. List your methods of calculation of your target explicitly.
    Make your instruments explicit.
    If your instruments are purchase of assets, list the exact order, in which you are going to purchase the assets. Similarly, list the exact order of sales when it is needed.

    This is the question of the creation of a monetary standard. It is a law. Laws are meant to be generally understood.

  53. Gravatar of Prakash Prakash
    6. February 2015 at 00:44

    @Charlie – The student debt/credit card bought by the fed would not relieve the borrower of that debt. He would be paying the interest would to the government, via the CB. The government could choose to give that money either directly to the borrower, which encourages people getting into debt or give it as a general tax cut, which does not.

    @Edward – I think that before going to direct payments into bank accounts, CBs should offer a collateral free NINJA loan, standard amount to all adults at a standard rate. Kimball’s Federal Line of Credit basically. So, even if the general interest rate is zero, a new interest rate regime starts here at the standard rate. Reduce this interest rate until the monetary target is reached. After reaching zero here, expand the amount. You’ve reached helicopter drop territory. In reality, I expect as I said in a prev comment, way before that, even kids will be IPO’ing their lemonade stands and will be flush with cash. I’ll be VERY surprised if the nominal targets are still not met.

  54. Gravatar of James in London James in London
    6. February 2015 at 02:25

    Great news from Japan. It even got a mention as one of the reasons for the stock market moving up there this morning.

    http://www.bloomberg.com/news/articles/2015-02-05/abe-bolsters-kuroda-reflation-effort-with-boj-board-nomination

    Do you know Harada? “Not just a reflationist” but believes in fiscal consolidation too.

  55. Gravatar of TravisV TravisV
    6. February 2015 at 05:40

    Does this jobs news mean the Fed is going to tighten this summer?????

    Does this jobs news mean the Fed is going to tighten this summer?????

  56. Gravatar of Todd Ramsey Todd Ramsey
    6. February 2015 at 06:31

    @Kenneth Duda, Krugman dismisses the “Say’s Law” argument with reference to the debates of the 1930s that I don’t believe to be settled science.

    Can you please point me (honestly, not rhetorical) to a post that explains, when the government taxes and spends or borrows and spends to achieve your multiplier of 1, where do the real resources — as opposed to the bank account balances — come from?

    Also, is there any way you can pay for somebody to clear Scott’s snow so he has more time to advance the cause of market monetarism? It would be one of the most striking examples of comparative advantage I can imagine. :}

  57. Gravatar of TravisV TravisV
    6. February 2015 at 07:13

    Today’s surge in bank stocks seems irrational to me……

    http://seekingalpha.com/news/2280606-rate-hikes-coming-financials-up-big-after-jobs-number

  58. Gravatar of TallDave TallDave
    6. February 2015 at 08:20

    TallDave, I tried a snow removal service, and found them to be almost useless (as do my neighbors.)

    Really? Wow. Maybe your area is underserved? You might have better luck if you pick one through Angie’s List or similar review-based lists.

    Mine not only does the driveway, they do our walkways as well, and will even salt if you leave some out for them. Maybe our area isn’t typical though, I think maybe one guy on our street does his own shoveling, and almost all of us have landscape services too.

    I have to warn you, I am seriously contemplating a Shovels For Sumner project on Kickstarter …

  59. Gravatar of Charlie Jamieson Charlie Jamieson
    6. February 2015 at 08:28

    Charlie – The student debt/credit card bought by the fed would not relieve the borrower of that debt. He would be paying the interest would to the government, via the CB. The government could choose to give that money either directly to the borrower, which encourages people getting into debt or give it as a general tax cut, which does not.

    Prakash – if the central bank bought the debt, it would pay the bank for the debt, and then hold that debt to infinity without seeking interest or payment. This is what it does with T-bonds in QE. The Fed is never going to the Treasury and say, ‘Hey, these T-bonds are maturing, give us $1 Trillion and we’ll destroy the bond and the $1 Trillion.
    If we all want to *pretend* that I will someday pay the debt in order to keep the accounting straight, then we’ll do that. The rules of lending require us to pretend rather than trigger another bank crash.

  60. Gravatar of ssumner ssumner
    6. February 2015 at 08:46

    Britonomist, You said:

    “To me, it’s not about you being convinced, it’s about you convincing others.”

    I’ve already had success 100X beyond my wildest dreams. There is much more to be done, but I feel I’m on the right track.

    Collin, Inflation is determined by monetary policy. None of the factors you cite have any bearing on inflation.

    CMA, They are wasteful because they lead to future tax increases, which are distortionary. We’d all like to see $100 bills raining down on top of us, but to think that that policy would not have costs is to reject everything economics has taught us over the past 300 years.

    Ben, One of the nice things about NGDPLT is that it has wide support on both sides of the ideological spectrum. What other policy can say that?

    Edward, You said:

    “For purely distributional purposes, helicopter drops are more “just” (if they are mailed to all citizens) than QE which is so easily tarred as a big bank giveaway.”

    That’s a common perception, but it’s completely false. The QE money is not “given” to the big banks. On the other hand the IOR is a sort of giveaway, and is unjustified in my view.

    Ralph, NGDPLT and 4% inflation targeting are proposed so that (massive) QE is not necessary. I thought that was obvious.

    Prakesh, You said:

    “Declare your target explicitly. List your methods of calculation of your target explicitly.
    Make your instruments explicit.
    If your instruments are purchase of assets, list the exact order, in which you are going to purchase the assets. Similarly, list the exact order of sales when it is needed.”

    I’ve done all those things in previous posts. I favor the purchase of Treasury debt, then debt that’s fully guaranteed by the Treasury. That would be enough under NGDPLT, but if it were not I’d favor the purchase of foreign government debt.

    James, Thanks, I’ll do a post.

    Todd, I can afford to hire someone to clear my snow, and indeed have used several firms in the past. None were reliable.

    Most winters I don’t mind doing it, as I need the exercise—but this winter is way too much exercise.

  61. Gravatar of TravisV TravisV
    6. February 2015 at 10:12

    Ha! Keynesian Jared Bernstein is shocked, shocked that “With all the labor market improvement, surely wage growth is accelerating…nuh-uh.”

    http://jaredbernsteinblog.com/with-all-the-labor-market-improvement-surely-wage-growth-is-accelerating-nuh-uh

  62. Gravatar of Major.Freedom Major.Freedom
    6. February 2015 at 10:23

    Edward wrote:

    “For purely distributional purposes, helicopter drops are more “just” (if they are mailed to all citizens) than QE which is so easily tarred as a big bank giveaway.”

    Sumner replied:

    “That’s a common perception, but it’s completely false. The QE money is not “given” to the big banks. On the other hand the IOR is a sort of giveaway, and is unjustified in my view.”

    Edward, you are correct and Sumner is incorrect. He does not understand how even “swaps” entail a “giveaway.” The giveaway is subtle and more difficult to discern than outright cash injections that do not have any directly observable “swapping” of “something” in return.

    If the entire banking system is undergoing a so-called “credit crunch”, where a class or classes of assets held by most banks are incurring losses, then without a central bank, these assets are all else equal sold for less money than would otherwise be the case with a central bank. This is because of the law of demand. With a central bank there is more money available to buy a given supply of assets. So the prices of assets can be higher even before a central bank actually “prints money”. The expectation drives the prices of those assets upward.

    Since treasury bonds can be bought by the broader population of investors, an investor who wants to buy treasuries will not only pay a higher price because of the above, but their own bids put additional upward pressure on the price as well.

    This is just one way in which banks are bailed out. They end up able to sell their assets at higher prices than would otherwise be the case. This is the case even if we observe a temporal decline in the prices of treasuries! In these circumstances the decline is less than it otherwise would have been had the central bank purchased other assets besides treasuries. Take MBS for example. The Fed printed and spent over a trillion dollars on MBS. Why would they do this? Because they are smarter than Sumner and know that doing so will raise the prices of MBS in the open market as compared to buying only treasuries.

    This DIFFERENCE between the price of the MBS and Treasuries that exist with the central bank buying them with printed money, versus those same assets sold in without a central bank buying those assets, is the “giveaway” Edward referred to.

    Sumner you are absolutely wrong to assert that banks are not in receipt of free value that just come at the expense of everyone else.

    Then there are the market minded, stylistic factual understanding. There are “primary dealers” who have the legal privilege of dealing with the central bank directly. Now surely even a so-called EMH minded intellectual should pause and ask himself whether or not people fighting tooth and nail to get on that primary dealer list, and who do not willingly abandon being on that list, that fact alone should tell you that regardless of one’s beliefs on the Cantillon effect (which actually takes place), the fact that they choose to be on the list rather than not should tell you that there are gains to be made by being on the list as opposed to not being on the list.

    I strongly recommend scoffing at and dismissing any notion from Sumner that even hints at the idea that all the primary dealers and all those who are not but want to be, are all stupid morons who can’t see what Sumner claims to see, which is that there are no special gains to be made as a primary dealer, or that there is no indirect giveaways of value (that necessarily come at the expense of everyone else since the Fed doss not produce real wealth).

    Then there is the other stylistic fact that empirically, QE is correlated with a much MUCH larger “recovery”, relatively speaking, at Wall Street, as compared to Main Street. No this is not a tacit ploy to advance communism or populism. It is a direct exposing of economic fascism. The reason why “Wall Street” recovered so much more relative to “Main Street” after QE is the same reason why it suffered so much more relative to Main Street right before QE during the credit crunch: it is because central banking has LARGER effect on Wall Street for both monetary expansion and monetary contraction. Wall Street is relatively more “dependent” on central banking than Main Street. And why? Because it is closer “in line” to the money spigot. Wall Street institution executives and owners do not even need to know the precise mechanism by which they can gain relatively more by inflation than everyone else. They only need to look at and expect where the relative risk adjusted profits are and will be highest.

    Of course EMH stunts one’s ability to understand this, because EMH cannot assimilate the market PROCESS. It can only speak of states of rest, of equilibriums. It handwaves away the real world, on the ground, TIME constrained mechanisms and processes.

    Everyone, if you want to improve your knowledge of the world, I highly recommend you completely ignore Sumner on this. He is either not able or not willing to understand that which politically undermines his ideology at its core. No, this does not require you to fully adopt everything I think…yet. You can promote inconsistent ethics in another way…for now.

    I mean how difficult would it be for him to admit that what he advocates is a perpetual class warfare and economic fascism? That what he thinks will “help” is really just an entrenching and perpetuation of wealth transfer within the population? He needs to be able to sleep at night, and that is his motivation. Please don’t mistake his intentions as motivated by truth. He knows what he believes is untrue, which is exactly why he has to seek out and rely on obtuse philosophers like Rorty, who preach we cannot know truth, to find justification in his preaching untruths. The masses are too stupid, etc. Reason is unreliable, etc. So we’re told the self-contradictory claim “Truth does not exist”. (For those who aren’t afraid to rely on simple logic, and are not afraid to conclude that Sumner is wrong, that quoted assertion entails a performative contradiction. Uttering the statement is itself a claim of what is true about reality, specifically the truth of the human mind, namely, that the truth of the human mind is that it cannot know truths of reality. Let that digest for a bit if you can’t see the contradiction right away).

    I humbly submit that witchdoctoring is an apt characterization of these blog posts.

  63. Gravatar of Prakash Prakash
    6. February 2015 at 10:24

    @Charlie, the only reason the fed does that with treasuries is because it pays all its earnings to the treasury. It cannot do that with credit card and student loan debt without facing accusations of encouraging moral hazard. A generalised amnesty which makes sure that the prudent people also get money is better in my opinion.

    @Scott , I know you had mentioned these before. I was just making a point which I want to emphasise. MM’s want rules and not discretion. I feel that persuading the public to favour open market operations over helicopter drops will mainly involve explaining to people that an announcement of the list in advance may be a one-time boost to certain assets, but it will not be a permanent distortion. After the announcement, the market would have already adjusted to the new equilibrium.

  64. Gravatar of Charlie Jamieson Charlie Jamieson
    6. February 2015 at 11:38

    Prakash: I’m talking about the principal on the debt. The central bank could (in theory, and with a little massaging of the rules) buy student debt from the banks and then just hold the loan as an asset and never try to collect on the principal.
    As for not encouraging moral hazard, well, it lost credibility on that score when it bought levered MBS.

    I’m really not advocating this idea, but if we’re all going to be lining up at the trough then we should push young people to the front.

  65. Gravatar of Floccina Floccina
    6. February 2015 at 11:47

    Speaking of 4% inflation when are we going to get rid of the penny? Would few years of 4% inflation get us to a point where we can get a new dollar?

  66. Gravatar of Doug M Doug M
    6. February 2015 at 11:56

    Floccina,
    I would vote for any politician who pledged to phase out the penny.

    They could be the candidate against change.

  67. Gravatar of Brian Donohue Brian Donohue
    6. February 2015 at 13:03

    @Prakash, I must say, the way you describe it is very Hayekian.

  68. Gravatar of CMA CMA
    6. February 2015 at 14:50

    “CMA, They are wasteful because they lead to future tax increases, which are distortionary. We’d all like to see $100 bills raining down on top of us, but to think that that policy would not have costs is to reject everything economics has taught us over the past 300 years.”

    I was refering to to emoney heli drops conducted independantly by fed. The fed has no budget constraint so it prints what’s required and will never tax back.

  69. Gravatar of Ray Lopez Ray Lopez
    6. February 2015 at 21:08

    Sumner: “Britonomist, So the worst that can happen is that the country doing the QE owns the rest of the world, and AD still doesn’t rise?”

    No, the worst that can happen is that a country doing QE has its central bank own lots of junk paper, and, in printing money to buy this junk paper, inflation ignites and the USA becomes Zimbabwe.

  70. Gravatar of Prakash Prakash
    7. February 2015 at 05:54

    @Charlie- I understand. We’re all talking about second or third best formulations here. But to your young people comment, there is a young man who does a course and is under debt. There is another who joins McDonalds after high school. If we’re talking about disbursing money, I see no reason to favour the former over the latter. I believe that Steve Keen’s modern debt jubilee idea had this feature. Money would be given to all. For those who have debts, those debts are discharged. For those that don’t, they just get money in the bank.

  71. Gravatar of Michael Sugnan Michael Sugnan
    7. February 2015 at 07:05

    Scott,

    I think there has been at least one historical proposal to target wages. In the inflationary 1970’s, the Keynesian economist Sidney Weintraub advocated for a tax- based incomes policy that imposed tax penalties on firms that offered wage increases higher than the rate of productivity increases. I realize this proposal is very different from yours and comes from a very different view of the world.

    Michael S

  72. Gravatar of Mike Sax Mike Sax
    7. February 2015 at 11:50

    “In criticizing policies 2 through 7, I may have fallen short in giving readers a sense of my views as to the lesser of evils. If you pair any two items and convince me that they are the only two feasible alternatives, then this list tells you which one I will “support.” But of course bloggers have to be careful, as when this information gets passed down the line, it gradually morphs from “Sumner considers X less bad than Y” to “Sumner supports X.”

    I appreciated this post overall as it gives me a better idea of what your value scale is and what is your ‘lesser of 2 evils’, etc.

    I think I can fairly speak for many liberals and/or Keynesians here that nothing beneath number 5 would seem objectionable to them.

    Of course, 1-4 could theoretically be combined into different permutations. You could do 4% inflation target and more government spending. I certainly could live with any number above 5 either by itself or combined with another number above 5.

    When I looked at 3 my thought was that this might not be a bad policy but good luck every getting Congress to agree to it. I think many liberals would probably trip over why policy 3 calls for an employer side payroll tax cut rather than employee and chalk it up to the idea that conservatives prefer more regressive tax policies.

    Understand that’s what I imagine many liberals might say-not necessarily what I’m saying, I think I have an idea of what the preference for employer side is whether or not I agree with it.

    Where you begin to lose me-in that I don’t understand your preference and am trying to better understand it-is why number 5 tight money is preferable to number 6.

    If you are going to have tight money in both 5 and 6 why not at least have govt spending? I mean whatever distortionary tax policies could be in the future why is avoiding that more important than getting out of the recession?

    You seem here to only focus on the negative effects of fiscal policy but what about positive stimulative effects?

  73. Gravatar of Mike Sax Mike Sax
    7. February 2015 at 11:55

    I’m also not sure why you wouldn’t take up Kenneth Duda on his offer. If you’re certain that NGDP expectations plan couldn’t fail why not offer fiscal stimulus if it doesn’t work-as you see it not working as an impossibility.

    Seems to me if you’re certain on something you’d be willing to make the bet.

  74. Gravatar of ssumner ssumner
    7. February 2015 at 12:25

    Prakash, Fortunately, 99% of the public understands that helicopter drops of cash is not a good idea.

    Floccina, And the nickel!

    CMA, The Germans tried that in 1923.

    Michael, A much closer analogies is Rooke’s 1824 (roughly) proposal to use monetary policy to target wages. But don’t anyone tell Ray, or he’ll freak out that someone thought of something before Sumner.

    Mike, You said:

    “I’m also not sure why you wouldn’t take up Kenneth Duda on his offer. If you’re certain that NGDP expectations plan couldn’t fail why not offer fiscal stimulus if it doesn’t work-as you see it not working as an impossibility.”

    Well of course I’m willing to do that, but nobody would ever remember what I had actually agreed to. As far as I know even Krugman agrees that monetary policy by itself will “work” if pursued “a outrance”, that is buying up any and all assets until you hit your target. In practice, people would assume I actually support QE plus fiscal stimulus, if QE by itself is not enough. And that’s a very different proposition.

    First you’d have to tell me how many assets I’d be allowed to buy, before fiscal stimulus kicked in.

    And BTW, I’ve already advocated the sorts of fiscal stimulus that are not susceptible to monetary offset, like cuts in employer-side payroll taxes.

  75. Gravatar of Anthony McNease Anthony McNease
    8. February 2015 at 08:40

    TravisV:

    “Today’s surge in bank stocks seems irrational to me……

    http://seekingalpha.com/news/2280606-rate-hikes-coming-financials-up-big-after-jobs-number

    It’s not irrational. If the fed funds rate goes up then the prime rate goes up the same amount. All of the variable rate loans tied to prime will go up as well. Meanwhile with excess deposits available the banks’ costs of funds won’t go up much if at all. This increases margins significantly for the banks without having to do anything. It’s almost as if Bullard and Plosser are pushing for higher bank profits instead of healthy wage growth. The monetary cranks out there who believe the Fed is keeping rates low to help the banks have it backwards.

  76. Gravatar of Mike Sax Mike Sax
    8. February 2015 at 09:29

    So where does our actual policy of the last 6 years place in terms of preference?

    Obviously not as good as 1 and 2-would it be somewhere between 4 and 5 or is it preferable to 4?

  77. Gravatar of ssumner ssumner
    8. February 2015 at 11:25

    Mike, About the same as 4, it depends how wasteful the government spending is. If it’s the trillion dollars they are spending on jet fighters I’d say almost totally wasteful. If it’s infrastructure, much better. Wages subsidies for the poor, even better.

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    30. May 2015 at 11:33

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