The Price of (limited) Success

The recent success of market monetarism has attracted a lot of attention.  People who attract a lot of praise (especially excessive praise) will naturally attract their fair share of critics, particularly when their credentials are  . . .  questionable.  Still, I suppose it beats the alternative.

There’s a natural human tendency to want to boil down someone’s message, to make it easier to visualize what makes a group distinctive. I do think it is fair to say that market monetarists are obsessed with NGDP (at least I think it’s fair in my case, I can’t speak for others.)  But I don’t think this statement by Eli Dourado fairly characterizes the market monetarist position (again, speaking for myself):

I would like to see a greater emphasis in the blogosphere on understanding stylized facts about recessions, a greater willingness to explore micro phenomena (even if we are not using fully microfounded models), and more macro-ecumenicism. No one school of macro has it all figured out, and that includes market monetarism. There is enough ambiguity in our current situation that reasonable people can disagree about what is going on. But I don’t think that reasonable people can be totally certain that all we need is more nominal stimulus.

I’m not totally certain that my brain is not in a vat right now.

Seriously, I consider myself a moderate supply-sider, which puts me to the right of most economists.   That means I certainly don’t think “more NGDP” is all we need.   We have structural problems. To get back to where we were before the recession we’d also need to:

1.  Reduce the minimum wage rate, which was raised by over 40% right on the eve of the recession.

2.  Cut the maximum unemployment insurance benefit back to 26 weeks, from a peak of 99 weeks (and now 79 weeks.)

Other reforms would also help to reduce unemployment, such as legalizing self-employment in job categories that currently have occupational licensing laws.  I must have discussed the first two 100 times in my blog, if not more.  I would add that higher NGDP would reduce the real minimum wage, and would encourage Congress to lower the maximum unemployment insurance benefit, so even “structural problems” can be partly ameliorated by demand increases.  I frequently talk about how supply and demand are “entangled.”  From my point of view it’s the rest of the profession that is simplistic, treating AS and AD as if they were independent, like S&D.

I would add that under NGDP targeting it would make no difference whether unemployment is structural or not—policy would be exactly the same in either case.  That’s why it’s so important to get a rule-based, non-discretionary policy regime.  As long as we are having this debate, then monetary policy has failed.  Eli Dourado raises some other good arguments, which I’ll address in a separate post.

Noal Smith has a satire on the various internet schools of thought, including market monetarists:

Favorite blog: The Money Illusion

Favorite dead economist: No one. The spot is being reserved for Scott Sumner, along with thousands of life-sized terra cotta grad students.

Will appear in response to posts regarding: Monetary policy, macroeconomics, any word containing the letters “NGDP”

Craziest idea: Pegging the monetary policy of the world’s leading nation to an obscure and highly illiquid futures market

Special attack: NGDP-style kung fu

Secret weakness: Supply shocks

Notes: Having now effectively swayed the Federal Reserve and won essentially all of the Econ Blogosphere to their way of thinking, the Market Monetarists can hardly be classified as “trolls” any longer…

I know that it’s a great honor to be satirized by Noah Smith, but at the risk of seeming churlish I’m going to get all defensive here.  To be effective, satire must exaggerate certain recognizable characteristics. Let’s take the easiest case first, supply-shocks.  Supply shocks are the great weakness of inflation targeting, and what has drawn great minds like Bennett McCallum to NGDP targeting.  If it’s a secret weakness, the secret has been incredibly well kept.

And what can we make of the “highly illiquid futures market” comment? The central bank would promise to buy and sell unlimited quantities of NGDP futures at zero transactions costs at the target NGDP level.  That makes my proposed NGDP futures market the most liquid asset market in all of world history.  If people find Noah Smith’s market monetarism satire to be funny, it just shows how much work we have to do to educate the public as to what NGDP targeting is all about.

On the other hand Noah Smith’s barbs aimed at the other internet schools of thought are all completely accurate and hilariously funny. Highly recommended.  Well done Noah!  🙂

HT:  Tyler Cowen.

PS.  Given my current pace I’ll be dead soon enough, so start preparing that terra cotta army.



31 Responses to “The Price of (limited) Success”

  1. Gravatar of Noah Smith Noah Smith
    25. September 2012 at 11:57


    The “supply shocks” bit was due to Miles telling me that NGDP targeting is not as good at dealing with supply shocks as other kinds of rules (like nominal wage targeting).

    And markets’ liquidity is all about the frequency of trade!

    But anyway, I only included Market Monetarists as “trolls” after a bunch of people on Twitter insisted I do so…I thought you’d get a chuckle out of the “National Government Development Programme” pic at least…

  2. Gravatar of Kevin Dick Kevin Dick
    25. September 2012 at 12:03

    I saw the Noahpinion piece and thought it was hilarious on all fronts. However, I think a better satirical secret weakness for MM would have been Arnold Kling, but that’s probably too obscure.

    You must admit that you are probably one of the least likely poster boys for an intellectual movement, ever. So when you headline the skewering of a whole school of thought, just soak in the glory 🙂

  3. Gravatar of Eli Eli
    25. September 2012 at 12:11

    Thanks for the partial reply, Scott. I’m looking forward to your separate post.

    For the record, I never considered you to have the most extreme “all we need is more NGDP” view. I was referring more to the terra cotta army. So please don’t take that last sentence that you quoted as a personal attack on you.

  4. Gravatar of Morgan Warstler Morgan Warstler
    25. September 2012 at 12:16

    Far more importantly, the Morgan ball is being moved down the field, by Lars, thankee Buddha:

    It takes SO FRIGGIN LONG to get you people to move the discussion! We had to wait YEARS to finally say, we’re out of the short term” or “shouldn’t we see some demand recovery now”

    Why the wait? Why couldn’t we game out simply NO MAKE-UP with 4.5% NGDPLT?

    Why not just answer my question when it was asked?

    But it does move. Now thanks to Lars, and apparently the passage of time…

    Imagine how much further we would be if Scott said straight to DeKrugman, the first time he gave half hearted praise to a new target:

    “I’m throwing DeKrugman a bone and think there should be some make-up to trend, but even with no make-up whatsoever, even if the 4.5% rule required us to raise rates in the near term, NGDPLT delivers the the bulk of the monetary fix.”

    THEN we’d have fistacuffs and the real sides could be drawn.

    Instead it is confusion and wasted yammering.

    Why oh why can’t we have better econbloggers?

    Certainly, the lesson is if there is obvious FUTURE CONFLICT on the horizon, do not kick the can!

    Eventually NGDPLT shrinks the size of govt.

    We know that the same way that EVENTUALLY we have to explain why it works with no make-up.


  5. Gravatar of Integral Integral
    25. September 2012 at 12:20

    NGDP targeting is worse than strict IT at dealing with “long-run” supply shocks (TFP shocks), but better than strict IT as dealing with “short-run” supply shocks (where the tradeoff between inflation targeting and the output gap matters).

  6. Gravatar of Typhoon Jim Typhoon Jim
    25. September 2012 at 12:31

    Morgan remains uncategorizable.

  7. Gravatar of Adam Adam
    25. September 2012 at 12:32

    To me, the beauty of the NGDP point is that it makes a lot of the disputed points irrelevant (assuming it works).

  8. Gravatar of Conservative Krugmanite Conservative Krugmanite
    25. September 2012 at 13:21

    Noah also threw you a bone in his notes:

    “Notes: Having now effectively swayed the Federal Reserve and won essentially all of the Econ Blogosphere to their way of thinking, the Market Monetarists can hardly be classified as “trolls” any longer…”

  9. Gravatar of Morgan Warstler Morgan Warstler
    25. September 2012 at 13:31


    I just want to Fast Forward this movie.

    A year ago, Scott should have said this over and over to DeKrugman:

    “Therefore, if I had the choice between significant discretionary monetary easing on the one hand and NGDP level targeting from the present level of NGDP (rather than from the pre-crisis trend level) I would certainly prefer the later.”

    THEN, we would not have wasted any time.

    The immediate response from DeKrugman would be:

    “Munch, munch donut much, that is a terrible ideear! We’d have to raise rates right away!”

    And from there, we’d have no discussion about Fed credibility, the first NGDP action would be a kick in the nuts to the stock market and the federal budget.

    Credibility solved.

    Now IF that actually hurts the economy (and we’re not sure it does) then we see easing as we fall below 4.5%.

    We follow the now credible rule.

    What offends everyone is that we still have higher unemployment.

    What really matters is that Federal debt load… Bill Clinton gave away the goat as an off-hand comment – in his Obama speech… suddenly matters because borrowing rates are up.

    INSTEAD of listening to DeKrugman and Matty argue rates are low and we’re dumb for not borrowing…

    Make them say “we can’t have high rates, or else we’ll have to cut govt.”

    Then as the Federal Govt. is forced into a prone position, the stuff SCOTT WANTS, like downward pressure on minimum wage, UI benefits, and no public sector union pensions – becomes more likely.


    Doesn’t anyone notice that Scott says out loud that he wants Minimum Wage lower, and UI lower, and that he barely mummers quietly that his NGDPLT kind makes that happen?

    Do you think he hasn’t thought it through?

    Is everyone else so daft as to think that a small govt. guy’s policy is good for the big government set?

  10. Gravatar of genauer genauer
    25. September 2012 at 13:58

    the market money illusion ?

    When did the Fed adopt an explicit 2.0% inflation target ?
    wasnt it this spring ?

    Loose one, win one : – )
    in the moment people are digging the maastricht treaty for who has what amount of vote in which sequence.

    Could be Jens Weidmann , the First,
    one man, one vote
    just one man, to rule alone, as soon as target 2 gets catpitalized : – )

    taiwanese warships in japanese waters.

    And all this US ivory tower monetary squabble becomes somewhat less important

  11. Gravatar of PrometheeFeu PrometheeFeu
    25. September 2012 at 14:05

    I think the “Special Attack” should have been the Sumner critique. Except more flippant: “I guess you must think the Federal Reserve could just buy every single good in the economy without affecting the price level…”

  12. Gravatar of DanC DanC
    25. September 2012 at 14:09

    Having read you for years with some interest, I do think that the weakest part of your stuff is that, I think, you understate the structural problems in the economy. i.e. see recent post by Roberts on regulation. Look back at the writings of Friedman who preached about structural problems.

    Still, you have helped shape the current debate.

  13. Gravatar of Adam Adam
    25. September 2012 at 14:21

    DanC – Let’s say half of the higher-than-typical unemployment is structural. Just assume about 1.5% of the unemployment rate is structural.

    So what?

    Does that have any implications for monetary policy? Shouldn’t it be as accommodating as possible until the 1.5% or so that isn’t structural is gone?

    Or to put it in terms I think Scott could endorse, whatever amount of the problem is structural will be left if we have steady NGDP growth at 5%. If NGDP is growing at the targeted path and unemployment is still running above 7%, you’ve got a really strong case that it’s because of structural problems. But the case is much less strong when the Fed let’s NGDP fall off it’s path.

    There’s not much that can be done about structural problems in the short term. There relevance in the debate is almost exclusively as a means to argue against doing anything. As Scott’s goal is to encourage the Fed to do something, it’s hardly surprising that he doesn’t spend all his time talking about structural problems.

  14. Gravatar of Mike Sax Mike Sax
    25. September 2012 at 14:42

    Scott. You missed the most important part of Noah’s piece: Morgan Warstler got his own species.

    Did you notice Morgan? Congratulations. I think you totaly deserve it, though I think I deserve one too! Then of course there’s Major Freedom. How did he not get his own?

  15. Gravatar of Bill Ellis Bill Ellis
    25. September 2012 at 14:49


    Making the unemployed miserable and desperate creates jobs !
    And raising taxes on the elite a bit discourages them so much it destroys the economy.

    Forget about class…Seem to me like supply siders think that we are two different species.

  16. Gravatar of RPLong RPLong
    25. September 2012 at 15:07

    Everybody else took their licks with the trolls satire in stride, ssumner. You just made yourself look like a troll for real.

  17. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    25. September 2012 at 15:20

    I wish Bernanke would write something like this from a BoE member of their Monetary Policy Committee, David Miles;

    ‘Instead of focusing on the impact of QE on growth, attention has tended to concentrate on the reduction in
    gilt yields, probably because the impact of gilt purchases was most visible here. But it was never the ultimate objective of gilt purchases to lower gilt yields, just as a reduction in Bank Rate never has as its ultimate objective to lower yields on Treasury bills. Lowering gilt yields is only the first – and not necessarily the most important – link in a longer transmission mechanism whose overall effect is to increase the availability of funding for the private sector, raising demand for goods and services. The impact that the Bank’s asset purchases had on the spreads between gilt yields and yields on corporate bonds, and on
    different types of bank lending, has been at least as important for the economy as the impact on the yields
    on government bonds.’

  18. Gravatar of Doug M Doug M
    25. September 2012 at 15:27

    Bill Elis,

    You almost have it…Unemployment insurance! Paying people to not work! Why would you give someone an incentive to not work?

    Social Security — same thing.

    Minimum wage laws create unemployment.

    Regulations are a tax on output.
    And outright Taxes on output? Inane!

  19. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    25. September 2012 at 15:32

    More from the David Miles speech;

    ‘The Bank’s asset purchases can be reversed and are financed by the creation of reserves that pay Bank Rate. Therefore they are not the equivalent to permanent money financing of government spending. Yet some have argued that the Bank is effectively monetising the government’s debt and has lost the focus on its inflation target. I believe this criticism is misguided. Monetising the debt would involve the central bank buying up government bonds permanently, and financing the purchase by issuing non-interest bearing liabilities, independently of predicted inflation. That is the crucial distinction between QE and what I called helicopter drops of money done in a way that is not adjusted if it later generates inflation. The decision of the MPC to embark on asset purchases on an enormous scale was not done because it had abandoned the inflation target; it was done because of the inflation target. It was done because the outlook for demand has been so weak that unless monetary policy was set to offset this it was likely that inflation would ultimately be driven below the target level as output languished far below the productive potential of the economy. The fact that many asset purchases were made at a time when inflation was substantially above target meant that many people interpreted it as an abandonment of the target. But that would only be a natural interpretation if the current level of inflation was a good indicator of underlying inflation pressures – and that was clearly not the case for much of 2011 and into 2012. The fact that the Bank has bought £350 billion of assets and that most private sector forecasts now show inflation will remain near the target level is a telling piece of evidence against the argument that asset purchases show that the MPC has given up on inflation targeting.’

  20. Gravatar of ssumner ssumner
    25. September 2012 at 15:49

    Noah, I agree about wage targeting, which is the ideal policy. But I strongly disagree with this:

    “And markets’ liquidity is all about the frequency of trade!”

    Not at all. Infrequency of trades can reduce liquidity, but not if the Fed promises to engage in an infinite number of trades at a fixed price with no transactions cost. You are confusing things that affect liquidity, with liquidity itself. It doesn’t matter if there are zero trades, that would simply mean the Fed is doing a swell job.

    Kevin, Yes, I know I was being classless by complaining, but did it anyway.

    Eli, Don’t worry, you are about my most polite critic.

    Integral, I disagree, it’s also better for long run TFP shocks, for reasons identified by George Selgin. Remember, stable inflation is not the goal.

    Mike, I thought that sounded like Morgan.

    RPLong, That’s right.

  21. Gravatar of Bill Ellis Bill Ellis
    25. September 2012 at 17:52

    We all thought it sounded like Morgan. It was Morgan…

    Doug M…

    Yes if you pay people not to work it will keep them from working. That would cause unemployment.

    But if their are no are no jobs then making the unemployed miserable and desperate will not create jobs….not in a modern economy.

  22. Gravatar of Bill Ellis Bill Ellis
    25. September 2012 at 19:17

    No need to speculate…it is Morgan…

    So funny.

  23. Gravatar of Saturos Saturos
    25. September 2012 at 19:35

    NGDP-style kung-fu LULZ!!!

    Seeing that posted on this blog made my day.

  24. Gravatar of Saturos Saturos
    25. September 2012 at 19:40

    Yeah, supply shocks are our special strength. And even just looking at frequency of trade, that would be high too, because it’s supposed to be a subsidized market. Unless this is an inverse Art Laffer joke – we’re supposed to take into account that the market doesn’t exist yet.

    Morgan, you realize that the last one was you right? And it was the funniest one (thought MMT gave it a run for its money)?

    Eli Dourado is like the guy who has heard of Radiohead, and thinks their best song is “Creep”. Then he passes judgement on all of Radiohead’s fans, without listening to a single album all the way through. Eventually he starts thinking maybe their best song might be “Paranoid Android”, but still thinks Radiohead fans suck.

  25. Gravatar of Saturos Saturos
    25. September 2012 at 19:53

    BTW, Noah says that the Laffer joke is an obcure reference to the fact that Paul Erdos used to call people who had given up mathematics “dead”.

  26. Gravatar of James in London James in London
    25. September 2012 at 21:52

    Good metaphor!

  27. Gravatar of StatsGuy StatsGuy
    25. September 2012 at 22:29


    “at the risk of seeming churlish I’m going to get all defensive here”

    You do realize that the fact you felt _compelled_ to respond is precisely what makes it (supply side shocks) our secret weakness?

    It’s not a secret weakness of the theory, it’s just the thing that makes us froth at the mouth and become unable to stop typing.

    Hey, at least it’s not “memories of the parties they didn’t get invited to in college”…

    BTW, I think many financial experts would agree with you that market liquidity is not about the frequency of trade, but rather the depth of the order book. You describe this as the willingness to trade as price points near the current price, which is fairly accurate, but this willingness needs to be shared across multiple players, and needs a level of robustness that may be difficult to provide at a technical level. Witness the US S&P futures market, and the Flash Crash.

    Anyway, this is something we can spend a while working through – market making experts should beat up any singular mechanism exhaustively, and then beat it up some more. It’s that important.

    Meanwhile (even if it takes a decade), the knowledge that the Fed is NGDP _LEVEL_ targeting would itself be enough to take care of most of the issues, assuming that the markets are at all capable of arbitraging across short periods of time.

    It seems as if in the NGDP targeting buzz, the word “level” has gotten a bit lost.

  28. Gravatar of Saturos Saturos
    26. September 2012 at 03:25

    Scott, you realize Noah went after libertarians too? So your secret weakness is also “the memories of the parties you didn’t get invited to in college”.

  29. Gravatar of Noah Smith Noah Smith
    27. September 2012 at 14:33

    Scott, we’ve had this discussion about the futures market before! I still think that excess volatility in stock markets demonstrates that substantial noise exists in demand for assets at *any* price. If that is the case, then if monetary policy is a function f(x) where x is a vector of variables representing investor behavior in the NGDP futures market, then monetary policy will also experience excess volatility!

    In other words, the information content of the NGDP futures market may be less than that of a private forecast of variables that tend to affect NGDP…

  30. Gravatar of ssumner ssumner
    28. September 2012 at 06:02

    Noah, Actually the discussion you are bringing up right now is different from the liquidity issue we were just debating in this post. But OK, let’s move on to excess volatility.

    Bill Woolsey has suggested an easy solution to your concern. Have the Fed set up the market, but let the Fed continue to set monetary policy where they think best. Then if the Fed is smarter than the market they will make money. If not, then not.

    As long as the Fed allows me to freely get rich quick when it’s obvious they are screwing up (as in 2008) then I have no objection to giving the Fed whatever discretion it wants. I’ll be enjoying life in Beverly Hills as millions lose their jobs.

    On the other hand I think these markets would be more like T-bills, which are not volatile at all. No one knows the fundamental value of stocks, which is why they are so volatile. Indeed know one even has a clue. One could argue that stocks should be twice their current level–they massively outperform bonds, even adjusting for risk, in the long run. On the other hand the fundamental value of NGDP futures is very clear—next period’s actual NGDP.

    As an aside, the argument you just made is 100 times more powerful as an argument against Bretton Woods. The Canadians based their policy on pegging the Can$/US$ rate, which is much less closely tied to good macro outcomes than Canadian NGDP futures. So Bretton Woods should have been a huge disaster for Canada, but it wasn’t.

    As long as the Fed allows me to freely get rich quick when it’s obvious they are screwing up (as in 2008) then I have no objection to giving the Fed whatever discretion it wants. I’ll be enjoying life in Beverly Hills as millions lose their jobs.

    BTW, I apologize for going after your satire with such a humorless and classless post.

    Saturos, He’s right, I didn’t get invited to any college parties. The party organizers weren’t stupid. Maybe that’s why I’m so humorless. 🙂

  31. Gravatar of Saturos Saturos
    28. September 2012 at 21:11

    Scott, since you knew that the Fed was screwing up when others didn’t, wasn’t there some way for you to get rich quick on the markets anyway? Bet your beliefs?

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