The trouble with history

Warning:  The following post will contain broad generalizations that annoy many readers.  I hope it yields insights into the internet debate over monetary policy.

Over the past three years I’ve responded to numerous comments from people in either the post-Keynesian/MMT tradition or the Austrian tradition.  Many commenters seem self-taught—which is fine with me as I’m also mostly self-taught.  Many have gained insights from major interwar economists (especially Keynes, von Mises and Hayek.)  That’s also fine, as I’ve learned a lot from interwar economists like Fisher, Hawtrey, Cassel, Einzig, and Warren.

But there’s one problem with relying on interwar analysis—it’s very much a product of its time.  Prior to WWII, pure fiat money regimes were treated as pathological cases, associated with hyperinflation.  Most currencies were either fixed to gold, or expected to be fixed in the near future.  Studies have shown that the expected rate of inflation is roughly zero under a commodity money exchange, which is just another way of saying the expected change in the relative price of gold was roughly zero.  This had many important consequences for monetary policy:

1.  There was almost no Fisher effect in interest rates.  This meant that changes in nominal interest rates were probably a better indicator of the stance of monetary policy than today.  (Although still far from ideal.)

2.   Liquidity traps were more likely for two reasons; expected inflation was quite low, and the monetary authority could not credibly commit to a higher inflation target.  That made fiscal stimulus relatively attractive.

3.  The Phillips curve was more stable.

4.  The nominal/real distinction was less important.  The concept of the super-neutrality of money was not well understood.

One of my favorite Milton Friedman sayings was something to the effect that “In the past 200 years macroeconomics has merely gone one derivative beyond Hume.”

When I object to comments by MMTers or Austrians, it’s most often based on the issues listed above.  They seem a prisoner of the interwar period, failing to see how everything changes with a pure fiat money regime.

For instance, both types of commenters put too much weight in interest rates as an indicator of easy or tight money.  In the case of MMTers, there seems an inability to imagine “expansionary monetary policy” as being something like a shift from 10% trend inflation to 20% trend inflation, engineered via faster trend growth in the base.  You certainly won’t find anything like that in Keynes, as far as I know he never once discussed the idea of using central bank policy to permanently  raise the trend rate of inflation.  Of course if this were to occur, you’d get higher interest rates.  MMTers seem to assume the easy money would drive rates to zero, at which point the extra money would be hoarded.

MMTers also seem to make no distinction between real and nominal changes in bank balance sheets.  Consider a monetary policy that has no impact on real bank assets or liabilities. If it created higher inflation, then nominal deposits, nominal loans, and nominal reserves would all rise proportionately.  In that scenario it makes no sense to talk about loans causing deposits or deposits causing loans.  In real terms nothing has caused anything.  Thus the sort of considerations you’d use for analyzing a real change in the banking system is completely different from the sort of analysis you’d apply to a purely nominal change in the banking system.  Microeconomic factors determine the real size of the system (in the long run), whereas monetary policy explains any additional long run nominal changes.

The Austrians often complain that my 5% NGDP target proposal would lead to an unsustainable boom, and then a bust.  Let me be very clear that during the interwar period this criticism would be exactly correct.  A 5% NGDP growth track would have been completely unsustainable, and would have ended in tragedy. But that has no relevance for today, as money is approximately super-neutral in the long run.  You can do 5% NGDP growth from now until the end of time without any unsustainable imbalances developing.  (I don’t think the actual growth track of the 1920s, which was considerably slower, was unsustainable, but reasonable people can disagree on that point.)

Update:  The preceding paragraph assumed a commodity-backed currency, which limits long-term NGDP growth to about 3%/year.

In defense of interwar Austrianism, there was some merit in worrying more about booms than slumps.  After all, the natural rate hypothesis says that you can stabilize the growth track of RGDP by either cutting off the peaks or filling in the valleys—it shouldn’t matter.  But the tools available to policymakers were not symmetrical.  It was easier to restrain a boom via tight money, than to pump up a weak economy through easy money.   That’s because there’s a zero lower bound on gold reserves, but no upper bound.  It’s an asymmetry familiar to students of fixed exchange rate regimes.

But that asymmetry no longer exists in the modern world.  Indeed under a pure fiat regime an Australian NGDP trend growth rate (7%) might be best, as you’d never have to worry about hitting the zero lower bound.  So when Austrian commenters worry that 5% NGDP growth might be unsustainable, they are worried about a constraint that disappeared many decades ago.

I strongly recommend that both MMTers and Austrians take a look at Milton Friedman’s work on money super-neutrality, which is where I first learned the basics of monetary theory.  (Sorry, I don’t recall which articles.)

PS. I think both schools of thought have gained a bit of traction in recent years for roughly the same reason—the current 2% inflation target is a little bit like a gold standard.  So you get some stylized facts that seem to fit each model.  But never lose sight of the fact that central banks can change that target—and when that happens everything changes.

PPS.  I regard New Keynesian economics as the philosophy Keynes would have endorsed once he learned about the super-neutrality of money.


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111 Responses to “The trouble with history”

  1. Gravatar of Morgan Warstler Morgan Warstler
    21. May 2012 at 07:15

    Three things:

    1. “You can do 5% NGDP growth from now until the end of time without any unsustainable imbalances developing.”

    Scott, just come out and say “NGDPLT starting now with no make up, will fix things sooner than later.”

    The Dekrugman class needs to debate this subject with you, they ONLY like NGDPLT becuase of the promise of immediate inflation.

    I suspect that with a firm NGDPLT commitment, we’d get a pretty strong recovery right soon, and I suspect you ALSO SUSPECT that.

    Am I wrong? And if no, why don’t you extend your position?

    2. “l. It was easier to restrain a boom via tight money, than to pump up a weak economy through easy money.”

    JESUS CHRIST, this is exactly what NGDPLT does, it gets us bumping along at 5% and keeps pissing on booms.

    You even admit it tacitly with your comment on AUstralia at 7%.

    WTF? Why not focus your discussion on this point?

    I think you are afraid of really fighting DeKrugman.

    3. Check out this great graph on why the Fed is’t going to QE for Taxaggedon:

    http://www.powerlineblog.com/archives/2012/05/is-gop-trying-to-sabotage-economy-to-hurt-obama.php

    Obama didn’t do his job. That’s the REAL REASON and we all know it.

  2. Gravatar of Adam Adam
    21. May 2012 at 07:25

    Thanks, Scott, this is very helpful for those who are learning on the fly.

  3. Gravatar of Cedric Cedric
    21. May 2012 at 07:34

    Scott, longtime reader, first time questioner, and recovering Austrian. I’m just a little confused about this:

    “Let me be very clear that during the interwar period this criticism would be exactly correct. A 5% NGDP growth track would have been completely unsustainable, and would have ended in tragedy. But that has no relevance for today, as money is approximately super-neutral in the long run.”

    Can you explain this a little bit more or point me towards an old post that explains it? I understand why money is super-neutral in the long run, but why would 5% NGDPLT be great today but tragic in the interwar period?

  4. Gravatar of Ritwik Ritwik
    21. May 2012 at 07:51

    Scott

    This may be your second best monetary theory post ever, after the ‘My view on money and macro’ one.

  5. Gravatar of Josiah Josiah
    21. May 2012 at 08:07

    When I object to comments by MMTers or Austrians, it’s most often based on the issues listed above. They seem a prisoner of the interwar period, failing to see how everything changes with a pure fiat money regime.

    This is particularly ironic given that MMT’s shtick is that nobody else understands how fiat money has changed everything.

  6. Gravatar of John John
    21. May 2012 at 08:40

    Scott,

    Imagine for a second that you had a printing press and it was your task to provide enough money for the U.S. economy by printing money and spending it yourself. Would I be able to convince you to let me have the printing press by telling you Friedman’s theory of the super neutrality of money? I highly doubt it

    I will be sure to read up on Friedman’s idea of the super-neurtrality of money. As a self-taught Austrian, I don’t see any possible way in which money can be neutral in the long, medium, or short run. The only possible meaning of that to me would be to say that in the long run more money does not mean more production; but I certainly believe that in the long run too much money can lead to less production! Look at Argentina.

  7. Gravatar of Saturos Saturos
    21. May 2012 at 08:42

    “Milton Friedman’s work on money super-neutrality, which is where I first learned the basics of monetary theory. (Sorry, I don’t recall which articles.)”

    Aarrgh, talk about a tease! And how is super-neutrality different from ordinary neutrality?

  8. Gravatar of Alex Godofsky Alex Godofsky
    21. May 2012 at 08:52

    Saturos: money is super-neutral if different trend rates of change in the price level have the same long-run consequences.

  9. Gravatar of J.V. Dubois J.V. Dubois
    21. May 2012 at 08:56

    Cedric: “why would 5% NGDPLT be great today but tragic in the interwar period?”

    Because NGDP is Real GDP times inflation. If you use gold peg central bank does not really control money supply (and inflation), owners of gold mines do because there is upper limit of how much money you can print – and that is based on physical gold existing in the world. So in such a regime any form of NGDP targeting would sooner or later turn into RGDP targeting (once the central bank has all gold in existence in its vaults and it can no longer boost the nominal economy by printing the new money). In the long run RGDP is supply-driven and there is nothing central bank can do about it.

  10. Gravatar of johnleemk johnleemk
    21. May 2012 at 09:27

    Yup, like Cedric I was initially confused until I realised Scott’s meaning was “A 5% NGDP growth track [under a commodity standard/peg such as that which existed in the interwar period] would have been completely unsustainable, and would have ended in tragedy.” That could have been clearer, since it’s not immediately apparent which difference(s) between the 1920s/30s and today contribute to the feasibility/infeasibility of NGDP targeting.

  11. Gravatar of Robert Robert
    21. May 2012 at 09:31

    @Ritwik

    Do you have the link to the “My view on money and macro” post?

  12. Gravatar of HankB HankB
    21. May 2012 at 09:45

    The real trouble with MMTers is that they’re communists pretending not to be. They obscure all of their primary agendas like their job guarantee which is basically their entire theory in a nutshell. They think the state can control everything in a totalitarian manner. It’s a political agenda pretending to be a money theory.

  13. Gravatar of ssumner ssumner
    21. May 2012 at 09:51

    Morgan, Anything new to say?

    Thanks Adam.

    Cedric, Because it wasn’t sustainable as long as the price of gold was fixed. The highest sustainable NGDP growth rate was about 3% under the gold standard.

    Thanks Ritwik.

    Josiah, Yeah, I was thinking the same thing when I wrote that.

    John, Look at Argentina? The country that saw falling RGDP under tight money, and then rapid growth after they devalued?

    Saturos, Ordinary neutrality says one time changes in the price level don’t affect real variables. Super-neutrality says changes in the rate of inflation don’t affect real variables (in the long run, naturally.) Two examples that Friedman emphasized were the natural rate hypothesis (shifting Phillips Curve) and the Fisher effect.

    johnleemk, Yes, I should add an update.

    Robert. I think he was referring to the link I provided in the right column.

    Hank, They do have some strange views in other areas, but I’m not qualified to comment. Indeed this post is more a reaction to MMT commenters than to the core ideology.

  14. Gravatar of 123 123
    21. May 2012 at 09:57

    Scott, most of our discussions here in the comments of this blog can be traced back to Hayek. My inspiration was Hayek’s “Use of knowledge in society”.

    Although it turns out that Hayek supported NGDPLT, I basically got NGDPLT from Friedman.

    Hayekian points that I have supported here many times include:
    1. recognizing the limitations of EMH
    2. recognizing that the vast majority of NGDPLT proposals ignore the problem of time varying risk premia
    3. recognizing that the NGDPLT schemes should be designed to be robust against the volatility created by the Minsky cycle. During the gold peg Minsky cycle had mostly caused the variation of NGDP growth rates, however NGDPLT would not abolish the Minsky cycle

  15. Gravatar of Greg Ransom Greg Ransom
    21. May 2012 at 10:06

    I’d like to hear more from you on the topic is the super neutrality of money — do you remember Friedman’s claims, assumptions and arguments?

  16. Gravatar of Bonnie Bonnie
    21. May 2012 at 10:19

    Morgan:

    It’s interesting that you would pick that article to link. It ignores completely the GOP blocking of Fed appointments to block Dodd-frank as if that can’t hurt the economy at all by cutting off the ability to adjust the thermostat, having monetary policy match fiscal policy. Granted, it was symbolic at best because most of the blame for not having the seats filled or providing alternate measures for monetary policy falls on Democrats themselves, at least 2009-10, some Obama and the rest Reid.

    Bernanke’s willingness to defend the indefensible in varying amounts disturbing, but he really doesn’t have that much power to make up for the abundance of stupidity and negligence of congress or the president to put the brakes on what’s going on over there or find their own way around it. There are plenty of things they could have done, and didn’t.

    I don’t know why any of this had to happen and I can’t defend it, but to say that the GOP didn’t contribute is not really true and I’m sorry that anyone believes the GOP will be able produce more desirable results when it is just fine to allow the bankers on the Fed to trash the economy. Maybe if there were a broader understanding of what happened to the economy, and where the bankroll of a lot of the campaigns is coming from, like for the guy who just unseated Lugar, people might have quite a different perspective on politics.

  17. Gravatar of HankB HankB
    21. May 2012 at 10:28

    Scott, all MMT is is an ideology. Most people don’t understand how the job guarantee is basically the entire theory. To MMTers it’s all about price stability and full employment. And they achieve this by assuming that the government has a monopoly on the supply of money and that this means the only way to achieve full employment is to have the government offer everyone a job.

    I can’t say Austrian econ is any different though. They’re just polar opposites on the political spectrum, but both extreme views of the world that should basically be ignored.

  18. Gravatar of Dan Kervick Dan Kervick
    21. May 2012 at 11:03

    In the case of MMTers, there seems an inability to imagine “expansionary monetary policy” as being something like a shift from 10% trend inflation to 20% trend inflation, engineered via faster trend growth in the base.

    I think the usual MMT way of addressing this phenomenon would be to accept that an increase in trend inflation that was due to monetary factors, and corresponded to an increase in the rate of broad money growth, would also correspond to an increase in the growth rate of the monetary base. But they would say that the order or causation goes primarily from broad money to monetary base, not from monetary base to broad money. So they are skeptical of the idea of monetary authorities engineering an increase in the broad money supply and creating money-induced inflation by directly targeting the size of the monetary base. They see CB monetary base operations as primarily accommodative responses to commercial bank lending decisions and the demand for credit, made with an eye to preserving its target policy rate.

    Of course if this were to occur, you’d get higher interest rates. MMTers seem to assume the easy money would drive rates to zero, at which point the extra money would be hoarded.

    Not sure about this. I can’t recall reading anything significant in the MMT literature about the problem of hoarding in relation to interest rates. But maybe it’s there and I missed it.

    MMTers also seem to make no distinction between real and nominal changes in bank balance sheets. Consider a monetary policy that has no impact on real bank assets or liabilities. If it created higher inflation, then nominal deposits, nominal loans, and nominal reserves would all rise proportionately. In that scenario it makes no sense to talk about loans causing deposits or deposits causing loans. In real terms nothing has caused anything. Thus the sort of considerations you’d use for analyzing a real change in the banking system is completely different from the sort of analysis you’d apply to a purely nominal change in the banking system. Microeconomic factors determine the real size of the system (in the long run), whereas monetary policy explains any additional long run nominal changes.

    Not sure exactly what all this means. But while recognizing the important institutional separation of the treasury and Fed, MMT promotes an analytic perspective on the government sector in terms of a consolidated balance sheet with Fed and Treasury combined. It thus sees no fundamental difference between fiscal and monetary policy. Government creates money with every payment they make into the non-governmental sectors of the economy and destroys money with each payment that goes from those sectors to the government. Buying an office building or buying a financial asset or paying interest on reserves or paying interest on a Treasury security are four ways for the government to inject money. Receiving a tax payment, or an interest payment on a security, or payment for purchase of a security, are different ways in which the government extracts money. The payments usually classified as “fiscal” however, can be more precisely targeted to promote various kinds of production or investment.

  19. Gravatar of Dan Kervick Dan Kervick
    21. May 2012 at 11:18

    And they achieve this by assuming that the government has a monopoly on the supply of money and that this means the only way to achieve full employment is to have the government offer everyone a job.

    Not the only way. But Warren Mosler argued in “Full Employment and Price Stability” that the absence of full employment is evidence that the government deficit is too small. The Job Guarantee or Employer of Last Resort program is put forth as a proposal for achieving full employment via changes in deficit spending, and with a program that is also used to preserve price stability.

    This is not all that different from the monetarist claim that price stability is achieved by the use of monetary policy, but it appeals to the MMT perspective according to which all government taxing and spending is essentially an exercise in monetary policy, and that that policy is not solely the domain of the central bank. MMT proposes using a government employment program, which offers a minimum wage job to anyone willing and able to work, as its key tool for price stability. Policy decisions over the level of that wage, and the rate at which workers are attracted away from the private sector or released into the private sector, is used to anchor prices.

  20. Gravatar of HankB HankB
    21. May 2012 at 11:21

    Dan,

    MMT doesn’t just see no difference between monetary and fiscal policy. MMTers are pure fiscalists. You think the government should only use fiscal policy to influence economic outcomes. So there is no such thing as monetary policy in MMT. MMTers want the Fed snuffed out and overnight rates set at zero permanently. You guys naively believe the economy can be controlled by taxing and spending more and less or by implementing totalitarian policies like your job guarantee.

  21. Gravatar of HankB HankB
    21. May 2012 at 11:24

    MMT is a theory Dan. And it’s a theory aimed at achieving full employment and price stability. The way the theory achieves this is through the job guarantee. It’s not just a “proposal” in MMT. It is basically the whole theory in a nutshell.

    I know you guys hide this fact because you know it’s not a popular political position to take and would expose your totalitarian and state controlled ideas.

  22. Gravatar of Greg Ransom Greg Ransom
    21. May 2012 at 11:24

    Scott, why was there a rise in unemployment in Cadada, and why was there a recession in Canada.

  23. Gravatar of W. Peden W. Peden
    21. May 2012 at 11:31

    On Argentina: Friedman’s point on different long-run paths of money/inflation growth was that a permanently highly variable rate of inflation will permanently depress RGDP e.g. because of the long-run contracts it makes impossible.

    In contrast, in the long-run, a society could adapt to a steady 1,000,000,000% inflation rate. When making a 20 year contract, for instance, you would factor such an inflation rate into the contract.

    Hyperinflation depresses RGDP not because the inflation is high, but because the inflation is high AND ACCELERATING. So different price levels are neutral (Australia and Canada have different price levels but very comparable economies) while changes in the rate of inflation are non-neutral in the short run if temporary and non-neutral in the long run if variable.

    In practice, IIRC Friedman recognised that the velocity of money was very variable at higher rates of money growth and that once inflation reaches a high level then it will be almost impossible to stabilise. There are also political reasons for thinking that any positive rate of inflation will be “ratcheted up” over time, whereas price stability was more politically robust because the public can latch onto the principle. So a flat rate of inflation or a deflatinary trend* is preferable in Friedman’s view.

    Superneutrality of the rate of change in the money stock as a short-run proposition was rejected by Friedman (his monetary theory of the business cycle obviously precludes such an analysis).

    Superneutrality of the rate of change in the money stock as a long-run proposition was endorsed by Friedman.

    Superneutrality of the variability of the rate of change of the money stock as both a short-run and a long-run proposition was rejected by Friedman. There can be short-run positive effects of a change in the money supply (Phillips Curve effects) but in the long-run the variability will have negative effects.

    In general, money supply/inflation changes and their relation to real activity in Friedman’s economics are like taking heroin and getting stoned. Taking a small quantity of heroin for the first time will get you stoned. However, if you only ever had that amount, you would build up an immunity to the toxin and it wouldn’t get you high. You would have to take an increased amount to get the same effect. If you stop at a particular level, the intoxicating effects will flatten out. On the other hand, if you go on taking more heroin or, even worse, have big fluctuations in the quantity of heroin you take, your chances of overdosing rise exponentially.

    Hyperinflationary economies are caught on the latter path, which is why there is such a threat of societal collapse. Advanced civilization depends on stable enforced contracts that span across periods of time; hyperinflation makes monetary contracts of this sort almost totally impossible. At the extreme, the society is faced with a choice between abandoning the currency and collapse into anarchy and starvation. In such a case, money is more than neutral.

    So Friedman’s position is compatible with the Austrian School position that high variability in the rate of change of the money stock as a result of the ABC is non-neutral. Friedman would disagree with the causal argument of the Austrians and he argued for a “plucking model” alternative, but on the issue of the neutrality of money the monetarists and the Austrian School are in agreement: it’s the variability that counts in the long-run, not the rate of change.

    Such a position has the virtue of both explaining why hyperinflationary economies are so weak AND why we see positive real effects of changes to a new money growth path in the short-run. Friedman may have got the demand function for money wrong (which ironically was what he mistakenly thought the quantity theory was all about) but he got the real meat of the quantity theory of money- the relationship between money, the price level and economic activity- just right. For the most part, so did Hume, which means that most of monetary theory since Hume has either been footnotes** or falsehoods.

    * Fitting Friedman’s essay “The Optimum Quantity of Money” with the rest of his work is difficult, since there he endorses a very severe trend rate of deflation as optimal and IIRC as having real benefits. One can understand Friedman preferring price stability because of political practicality, but if a declining price level is optimal, then money isn’t neutral. I defer to the experts on that one, because I found that essay extremely difficult to understand.

    ** Some very good footnotes that represent genuine progress.

  24. Gravatar of Ralph Musgrave Ralph Musgrave
    21. May 2012 at 11:36

    In the paragraph starting “MMTers also seem to make no distinction..”, you seem to claim that the idea that loans create deposits is invalidated where there is inflation of the right amount.

    True, but that is a trivial point. That’s a bit like saying that the idea that putting more water in a bucket increases the amount of water in the bucket is invalidated if there is a leak in the bucket.

    The proposition that putting water in a bucket will increase the amount of water in the bucket is a proposition made on the “other things being equal” assumption. And that assumption is so obvious that it should not need spelling out.

    Of course, it’s possible that the “loans creates deposits” process can take place at such a rate that inflation sets in, and the net result is no increase in deposits in real terms. Again, that is a trivial and obvious point, as far as I am concerned.

    Moreover, MMTers are not the only group who claim that bank loans create deposits. That idea is now general accepted. I attended a banking conference in Edinburgh a month or so ago where it was generally accepted that traditional text book descriptions as to how banks worked were out of date, and that text books coming out this year and next would include the idea that loans create deposits.

  25. Gravatar of anon anon
    21. May 2012 at 11:38

    Question: does interwar macro yield any useful insights about regional stabilization in a large currency area (such as the Eurozone)? Also; would such regional policy be worthwhile in addressing nominal imbalances among Eurozone countries (which are a major factor in the current crisis)?

  26. Gravatar of Dan Kervick Dan Kervick
    21. May 2012 at 11:44

    You guys naively believe the economy can be controlled by taxing and spending more and less or by implementing totalitarian policies like your job guarantee.

    Oh please. The Job Guarantee program would never employ more than a relatively small minority of the population, at the floor wage. Everything else is private sector just like now. What is totalitarian about that?

  27. Gravatar of Dan Kervick Dan Kervick
    21. May 2012 at 11:53

    HankB, of course it’s a theory. It makes a variety of causal empirical claims that are either true or false, just like other economic theories. If you don’t approve of them then just explain where they go wrong. The Job Guarantee is MMT’s proposal for achieving full employment within. It argues that once one understands the relationship between money, government spending and taxation, and employment, once will see that the way government achieves price stability is via a buffer stock technique, and that the choice is either an unemployed buffer stock or a fully employed buffer stock. It then argues that if full employment is a goal of economic policy, which most accept it to be, and if we can have both full employment and price stability with the JG program, and if the alternative price stability approach does not achieve full employment, then we should choose the JG option.

  28. Gravatar of HankB HankB
    21. May 2012 at 12:02

    “Oh please. The Job Guarantee program would never employ more than a relatively small minority of the population, at the floor wage.”

    So when Randall Wray says the job guarantee would currently employ between 10-20 million people that’s your definition of a “small minority”? Well yes, I guess that is a minority, but it’s certainly not small.

    Your communist agenda has clouded your mind.

  29. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    21. May 2012 at 12:11

    Scott, don’t pass on any opportunity to debate this UC economist;

    http://tube.7s-b.com/video/J51xvdAish4/Veronica-Guerrieri-on-adjusting-from-a-regime-of-easy-credit-to-one-of-tight-credit.html

    Though you may rush right out and buy a Fiat Abarth afterwards.

  30. Gravatar of Adam Adam
    21. May 2012 at 12:22

    I had a twitter exchange with Andy Harless this weekend. He said the only two major schools of macro thought were New Keynsianism and people who objected to it but had no alternative to offer, and that market monetarism wasn’t enough different from NK to count as major.

    I had to wonder how Scott would feel about the assertion that his views were essentially New Keynesian with a twist. I guess this post would suggest that answer is “basically okay.”

  31. Gravatar of fernando fernando
    21. May 2012 at 12:25

    HankB

    “So when Randall Wray says the job guarantee would currently employ between 10-20 million people that’s your definition of a “small minority”? Well yes, I guess that is a minority, but it’s certainly not small.”

    The goal of the job guarantee is to give a minimum wage job to people who would otherwise be unemployed.
    Think of it as a fiscal stabilizer, it s like unemployment benefits, only you have to work to get paid.

    Scott Sumner

    In the case of MMTers, there seems an inability to imagine “expansionary monetary policy”

    The trouble I have to understand monetary policy is that it only changes the composition of debt held by the private sector, it doesnt expand or shrink its balance sheet like fiscal policy.

    http://econviz.org/macroeconomic-balance-sheet-visualizer/

  32. Gravatar of Dan Kervick Dan Kervick
    21. May 2012 at 12:48

    Hank B, yes I would count 3% to 6% of the country as a small minority. The point of the program is to employ those who would otherwise be unemployed.

  33. Gravatar of HankB HankB
    21. May 2012 at 12:49

    Fernando,

    Just because one policy is misguided (pay people to do nothing for 99 weeks) doesn’t mean we should implement another policy that is misguided (paying people to pick up trash under the guise of “government employment”).

    That’s like saying that it’s better to shoot yourself in the foot than in the face. Thanks for that advice.

  34. Gravatar of HankB HankB
    21. May 2012 at 12:56

    Dan,

    That would DOUBLE the current number of government employees. So take your figures, multiply by 2 and then do a survey of Americans to find out if we need to double the size of the government work force?

  35. Gravatar of Major_Freedom Major_Freedom
    21. May 2012 at 12:59

    This blog post is a rather vacuous defense of the belief that economic laws do not apply to money. That’s all this is. Sumner is hoodwinked in the same way MMTers are hoodwinked. They also believe fiat money “changes everything”; that it allegedly transcends economic laws and can abolish scarcity, opportunity costs, and declining marginal utility.

    The same tactic was used by Marx when he tried to smear economic science with with his own brand of mystical historicism. He needed to destroy rationalism, the foundation for economics, because economic science refuted his entire edifice.

    You claim Austrians are “prisoners of the inter-war period”, but in fact Austrians are simply recognizing the implications of the fact that humans action is the foundation for all economic phenomena, and that they must choose specific courses of action that make all other courses of action impossible. This is not specific to the interwar period. It is timeless.

    Economic laws do not change over the course of time. Knowledge may change, technology may change, capital may change, actions may change, resources may change, but the fundamental laws, the logical constraints, these never change. The laws apply to money no less than shoes and potatoes. Market monetarists unfortunately get confused by money because it is based on one dimensional numbers that are easy to add, subtract, multiple and divide, which is attractive data for use in their flawed positivist approach. That’s the main reason why they fail to grasp the action foundation of money, why they strip money away from its action grounding and put it into some floating abstract world of verbal and definitional word-play, and so often end up with conclusions that violate economic laws.

    The Austrians often complain that my 5% NGDP target proposal would lead to an unsustainable boom, and then a bust. Let me be very clear that during the interwar period this criticism would be exactly correct. A 5% NGDP growth track would have been completely unsustainable, and would have ended in tragedy. But that has no relevance for today, as money is approximately super-neutral in the long run. You can do 5% NGDP growth from now until the end of time without any unsustainable imbalances developing. (I don’t think the actual growth track of the 1920s, which was considerably slower, was unsustainable, but reasonable people can disagree on that point.)

    That’s false. The effects of inflation on the economy’s capital structure has not changed. The laws of time preference and economic scarcity have not changed. That inflation always enters the economy at distinct points has not changed.

    Money is not neutral, and money is definitely not super-neutral. The neutrality of money is a myth that originated prior to the 16th century, when theologians and philosophers contemplated the concept of pure barter. It was this mental tool that then lead to the notion of neutrality of money. The problem was that the thinkers took that mental tool too far. It’s why we now have flawed concepts such as price “levels”, and the “equation of exchange”, and NGDP targeting.

    Individuals acting in the market are never presented with aggregates such as all the money that is spent, or all the money that exists. They instead choose between two limited quantities in their separate exchanges: money and goods, which they cannot have together. They decide which is more favorable to them at that time and at that place and in those particular conditions when they make their decisions. This is where prices arise. This is where our focus should be, not on the vain bird’s eye view of what is more useful in the eyes of a super-human intelligence.

    Monetary problems are economic problems. Period. Economics does not change with the introduction of universal fiat money, any more than economic laws do not change with the introduction of universal taxation.

    There is no constant relation between changes in the quantity of money and in prices. Changes in the supply of money affect individual prices and wages in different ways.

    What the economist discovers when he studies relations between demand and prices is not comparable with the work of the natural scientist who determines by experiments in his laboratory constant relations, e.g., the specific heat capacity of different substances. What the economist determines is of historical value only; he is in his statistical work a historian, but not an experimenter.

    All notions of an alleged separation between “short run” and “long run” in economics are fallacious. Every correct economic consideration is dynamic, not static. “Short run” and “long run” are static, mental tools only. They do not actually exist. There is only ever a continuous, gradual progress from short run to long run for each individual. It is this PROCESS that market monetarists ignore, and it is why they fail to see the consequences of inflation. They can only see final states of rest, and cannot understand the process by which these states are allegedly to be reached. It’s why Sumner feels compelled to minimize the Cantillon effect, why he feels compelled to minimize the relative spending and price changes that are brought about by inflation, and why he feels compelled to minimize every other dynamic process that takes place in between the so called short run and long run mental states of the economy.

    In defense of interwar Austrianism, there was some merit in worrying more about booms than slumps. After all, the natural rate hypothesis says that you can stabilize the growth track of RGDP by either cutting off the peaks or filling in the valleys””it shouldn’t matter. But the tools available to policymakers were not symmetrical. It was easier to restrain a boom via tight money, than to pump up a weak economy through easy money. That’s because there’s a zero lower bound on gold reserves, but no upper bound. It’s an asymmetry familiar to students of fixed exchange rate regimes.

    It is precisely the removal of an upper limit of inflation that makes the relative spending and price changes, and hence the relative capital structure changes, all the more acute and pronounced. The unsustainable boom leading up to the deep correction in 2008 could not have taken place under Bretton Woods, because central banks were at least limited in some respects in the ability to inflate. If you have been paying attention, since 1971 the corrections have been getting deeper and deeper, and the Fed has been inflating steeper and steeper. NGDP targeting, because it is not dropped on all our laps at the same time at the same rate, because it originates in the banking system, continuously affects the capital structure of the economy in a physically unsustainable way, and so NGDP targeting requires accelerating money inflation in order for it to “work.”

    The belief that a constant growth of NGDP requires only a constant growth in money supply is misguided. It is based on a flawed mechanistic view of money and spending.

    But that asymmetry no longer exists in the modern world. Indeed under a pure fiat regime an Australian NGDP trend growth rate (7%) might be best, as you’d never have to worry about hitting the zero lower bound. So when Austrian commenters worry that 5% NGDP growth might be unsustainable, they are worried about a constraint that disappeared many decades ago.

    That’s also false. The “constraint” Austrians are ACTUALLY talking about is economic scarcity, not money scarcity. The unsustainability referred to is not the inability of central banks to inflate, it’s the unsustainability of the real capital structure of the economy. A situation where investors engage in projects that require more scarce resources that actually exist, is the kind of unsustainability Austrians are talking about.

    Only if the Fed gives inflation money to every individual, and not just the banks who lend, will this unsustainability of capital structure be avoided.

    Credit expansion, and the concomitant lowering of interest rates from what it otherwise would have been (not necessarily lowering in the temporal sense from one day to the next), consistently attracts investors into starting projects that cannot be physically completed due to a scarcity of resources. It’s not that investors are stupid, it’s that they can’t observe what interest rates would have otherwise been without the Fed and without credit expansion. In an unhampered monetary order, interest rates rising and falling would be due to changes in the real savings rate. With a central bank and with fractional reserve banks, interest rates rise and fall for reasons apart from real changes in savings. This is the source of the economy being put onto a physically unsustainable trajectory. It hampers economic calculation.

    One has to look at the economy as consisting of individuals who engage in real production by using money as a means to calculate, where profit and loss will otherwise tend to make the capital structure sustainable. Introducing inflation to target some arbitrary aggregate spending level, which no individual investor or seller utilizes in their affairs, can only hamper their ability to calculate and allocate resources and labor into sustainable projects.

    I strongly recommend that both MMTers and Austrians take a look at Milton Friedman’s work on money super-neutrality, which is where I first learned the basics of monetary theory. (Sorry, I don’t recall which articles.)

    I strongly, emphatically, highly recommend that MMTers, Keynesians and Market Monetarists understand that the positivist methodology Friedman utilized is flawed. One should read the Ultimate Foundation of Economic Science, by Mises, and Economic Science and the Austrian Method, by Hoppe. Once one has the epistemological foundation of economics down pat, one should then read John Stuart Mill, John Cairnes, and Ludwig Von Mises’ work on the non-neutrality of money. For a primer on the non-neutrality of money, one can start with this short article.

    The super-neutrality of money is an article of faith, the same way price stability was an article of faith.

  36. Gravatar of GMC GMC
    21. May 2012 at 13:01

    Scott:

    Cedric said: I understand why money is super-neutral in the long run, but why would 5% NGDPLT be great today but tragic in the interwar period?

    You responded: Because it wasn’t sustainable as long as the price of gold was fixed. The highest sustainable NGDP growth rate was about 3% under the gold standard.

    I understand that that is an accurate statement, but wouldn’t it be more accurate to say that on a gold standard, it is meaningless to talk about a sustainable target for NGDP growth because on a gold standard, we don’t control NGDP?

  37. Gravatar of Major_Freedom Major_Freedom
    21. May 2012 at 13:39

    The easiest way to see the hypocrisy behind NGDP targeting is to just ask a market monetarist whether or not a monopoly money printer should be available to an individual, or firm, or city, to ensure nominal spending always grows at a particular rate on that individual, or firm, or city, no matter what the individual, firm owners, or city inhabitants do, and then ask why or why not. The non-crazy market monetarists would almost certainly say no, that shouldn’t be done, and the reasons they give you can turn around and use it on them when it comes to whatever “optimal currency zone” that supposedly should have a monopoly money printer to ensure nominal spending always grows at a particular rate, and watch their heads explode trying to justify the arbitrary yes/no dichotomy.

    For what if investors who invest in an “optimal currency zone” engage in some truly terrible investment decisions as a group? Shouldn’t the investors as a group lose money, which is only possible if “nominal spending” in that zone declines? If nominal spending never declines because of a monopoly money printer in the zone, then that means investors as a group will never lose money, no matter how terrible their decisions were.

    Imagine in an optimal currency zone the investments are so poor that bank account holders remove their cash from that zone, to hold offshore in some other zone. All else equal, that would make nominal spending there collapse. As it should, for that is the only way the bad investments there can be liquidated. But with a monopoly money printer, the bank accounts in the zone will be topped up again with newly created money, so that nominal spending does not decline there.

    Could a market monetarist be honest, upfront, and clear and tell me why in the world I should accept the market monetarist claim that a currency zone should always have increasing nominal spending, but an individual firm, or city, should not? What the hell is so special about an optimal currency zone that justifies a money printer ensuring nominal spending never falls that distinguishes it from an individual person, or firm, or city, or any other geographical area?

  38. Gravatar of Tommy Dorsett Tommy Dorsett
    21. May 2012 at 14:50

    Scott — Bernanke seems to have us on a 2% breakeven price rule: http://research.stlouisfed.org/fredgraph.png?g=7nC

    Notice that the Fed has tended to back off on stimulus when breakevens go to 2% or more; the Fed hints at more stimulus when spreads fall to 175 bps and we get a new easing program (qe2 in 2010 and the low/rate/woodford commitment/twist in 2011) when breakevens fall to 150 bps.

    Faster RGDP from the supply side would get us faster NGDP if it also lowered inflation expectations via the AS curve shifting. Otherwise it looks like we’re stuck at about 4% NGDP unless the banking system heals enough to press breakevens back above 200 bps and the Fed allows it due to undershooting the other leg of their mandate.

    Considering all this, perhaps it’s not such a good time to risk an adverse AS shock by doubling capital gains taxes and tripling taxes on dividends. I’m more worried about this than the bulk of the Bush tax cuts expiring that were nothing more than zero sum income effects via tax credits. There’s no Laffer Curve effect there, it loses revenue and doesn’t stimulate growth. Yet, those ‘middle class cuts’ are the only ones with bi-partisan support. Our political class is a joke. Republicans are hopeless on monetary policy and Dems are tone deaf on incentive-oriented fiscal policy.

  39. Gravatar of Dan Kervick Dan Kervick
    21. May 2012 at 14:58

    We do Hank. But it isn’t about current poll results. It’s about convincing people that it is both more morally decent, and makes better long-run economic sense for the country to keep people working and avoid the large cyclical demand shocks caused by sudden mass unemployment.

    And also, not everyone despises the government and the people who work for it.

  40. Gravatar of The trouble with history « Economics Info The trouble with history « Economics Info
    21. May 2012 at 15:02

    […] Source […]

  41. Gravatar of Morgan Warstler Morgan Warstler
    21. May 2012 at 15:13

    Scott,

    It’s old to me… but still new for you.

    Please point me to the post where you describe the predicted time DIFFERENCE between:

    1. your preferred NGDPLT (with make up)
    2. NGDPLT starting now with no make up

    We know you’d take #2 if you had to…

    What I want to know is what is the marginal impact in doing #1?

    Does make up get us to a smooth running economy 2 years faster? 10 years faster? 1 year?

    I think that’s a good question.

  42. Gravatar of ChargerCarl ChargerCarl
    21. May 2012 at 15:34

    just wondering, does anyone actually read major freedom’s posts?

  43. Gravatar of dwb dwb
    21. May 2012 at 15:50

    there are four stages we go through here:
    1. read MFs posts.
    2. attempt to get into a pointless debate when s/he makes a mindnumbing post.
    3. realize s/he is a bot recycling silly circular arguments.
    4. ignore

    there is a 5th stage, not everyone gets here:
    5. poke fun to facilitate someone else moving from stage 2 to 3

  44. Gravatar of HankB HankB
    21. May 2012 at 15:52

    Dan,

    If the government could prove that it could sustain productive jobs for everyone who wants one then the USA would have lost the cold war under the flurry of productive Soviet workers who built their economy up into the world’s most powerful. Instead, the statist dream died. Stop trying to revive it.

  45. Gravatar of anon\portly anon\portly
    21. May 2012 at 16:30

    But what about this quote I just read from Robert Waldmann?

    “…try to think of an empirically relevant idea in macroeconimic theory not to be found in “The General Theory …”. If you succeed, you will be the first.”

    http://delong.typepad.com/sdj/2012/05/what-are-the-core-competences-of-high-finance.html#comments

  46. Gravatar of Peter N Peter N
    21. May 2012 at 17:12

    Major Freedom raised an interesting point:

    “The unsustainability referred to is not the inability of central banks to inflate, it’s the unsustainability of the real capital structure of the economy. A situation where investors engage in projects that require more scarce resources that actually exist, is the kind of unsustainability Austrians are talking about.”

    I think that if you said “investors are lead to expect real ROIs that in aggregate would require more scarce resources than will actually exist at the planned time of realization”, you would have a good description of Europe’s current problems.

    People have invested/planned on real returns that exceed the resources that will be available. No monetary policy will affect what is, in effect, a sunk cost. The choices involve how the real resources will be apportioned.

    This is the debt problem. If the debt is to be paid, then the ratio of nominal to real determines which party will suffer a loss in real terms.

    Retirees with mostly fixed income investments hate inflation, even if they get Social Security COLAs. Maybe super-neutrality will prevail in the long run, but in the long run they’ll be dead.

    The mess in Europe is a dispute between rentiers who feel cheated out of their expected real returns, and debtors who lack the resources to service the debt.

    Increased rentier aggregate demand can’t compensate for decreased debtor aggregate demand, because creditors base spending decisions on their expected real returns and have, which have become highly uncertain. At the same time this demand shortfall increases the size of the debts relative to the income needed to service them.

    What we seem to be seeing is a Fisher debt trap cycle without much goods price deflation. Instead the driving forces are asset price deflation and unemployment. The common currency promotes price stability in goods that have eurozone markets, but not in goods and assets that have purely local markets.

    Maybe local monetary policy would have prevented this mess, but it’s hard to see how a eurozone wide monetary policy can fix it. It may help in France and Germany (which is in a great deal of trouble), but the debtor countries and individual debtors will need some kind of sufficiently large coordinated and targeted intervention.

  47. Gravatar of dwb dwb
    21. May 2012 at 17:20

    @Peter N:
    but the asset price level upon which the debt was borrowed is a function of the nominal gdp path.

    when ngdp path drops, so does the asset price (the debt does not). the incentive to default persists until all the debt contracts are worked out at the new price level. You can do this the easy way (return ngdp back to trend) or the hard way (defaults). once the asset price level resets, there is some price at which demand returns.

  48. Gravatar of Major_Freedom Major_Freedom
    21. May 2012 at 17:27

    dwb:

    These are the actual stages:

    1. Sumner makes a post.
    2. Major_Freedom corrects errors in the post.
    3. Sumner’s acolytes sense the Queen Bee is threatened, so they fall over themselves trying to get a lick in, except they often spew fallacy after fallacy.
    4. Major_Freedom points those fallacies out.
    5. Acolytes repeat the same nonsense that was refuted in the past.
    6. Major_Freedom repeats the same refutations of those fallacies.
    7. Acolytes accuse Major_Freedom of arguing in circles, failing as always to see that it is THEY who are arguing in circles, since none of the acolytes are grounding any of their claims on a solid foundation.
    8. Lather, rinse, repeat.

  49. Gravatar of dwb dwb
    21. May 2012 at 17:31

    well, i am glad that you at least have a sense of humor about it.

  50. Gravatar of Dan Kervick Dan Kervick
    21. May 2012 at 17:44

    HankB, it doesn’t have to prove it can maintain productive jobs for everyone in the entire economy; only for that relatively small percentage of people who are left unemployed by the private sector. Why is this such a confusing concept for you?

  51. Gravatar of Major_Freedom Major_Freedom
    21. May 2012 at 17:46

    Peter N:

    I think that if you said “investors are lead to expect real ROIs that in aggregate would require more scarce resources than will actually exist at the planned time of realization”, you would have a good description of Europe’s current problems.

    Bingo. The same problem exists in the US, it’s just that we have the blessed curse of having the world reserve currency, and so we can export our inflation to keep our unsustainable economy going, whereas Europe hits the wall sooner.

    People have invested/planned on real returns that exceed the resources that will be available. No monetary policy will affect what is, in effect, a sunk cost. The choices involve how the real resources will be apportioned.

    Peter N, in contradistinction to the cornucopia of those suffering from quantophrenia on this blog, you think like an economist. You look at REAL RESOURCES from an action foundation, and you know that this is the foundation of economics.

    This is the debt problem. If the debt is to be paid, then the ratio of nominal to real determines which party will suffer a loss in real terms.

    I know! Let’s advocate what market monetarists advocate for: More inflation, which means more credit expansion, which means more debt! That ought to solve the problem of bad debt. Create more of it!

    Retirees with mostly fixed income investments hate inflation, even if they get Social Security COLAs. Maybe super-neutrality will prevail in the long run, but in the long run they’ll be dead.

    Retirees and those on fixed incomes are the sacrificial fodder of the market monetarist’s war against economic calculation. The defense? Inflation is peanuts compared to taxation, so ignore the market monetarist pickpockets and focus on the bigger criminals instead.

    What’s that MMs? Inflation will exist in a free market in money? Only if the individual chooses to use a money that is subject to inflation, which is different than forcing them to use a specific money through legal tender and taxation laws and then reducing their purchasing power.

    The mess in Europe is a dispute between rentiers who feel cheated out of their expected real returns, and debtors who lack the resources to service the debt.

    Increased rentier aggregate demand can’t compensate for decreased debtor aggregate demand, because creditors base spending decisions on their expected real returns and have, which have become highly uncertain. At the same time this demand shortfall increases the size of the debts relative to the income needed to service them.

    What we seem to be seeing is a Fisher debt trap cycle without much goods price deflation. Instead the driving forces are asset price deflation and unemployment. The common currency promotes price stability in goods that have eurozone markets, but not in goods and assets that have purely local markets.

    Maybe local monetary policy would have prevented this mess, but it’s hard to see how a eurozone wide monetary policy can fix it. It may help in France and Germany (which is in a great deal of trouble), but the debtor countries and individual debtors will need some kind of sufficiently large coordinated and targeted intervention.

    Didn’t you know? MMs say the Euro was a bad idea. They want more locality in money sovereignty. Ask them about taking that argument to its logical conclusion, which of course is monetary sovereignty at the individual level, which means a free market money. Then they’ll say they prefer a free market in money, they’re just busy right now trying to talk out of both sides of their mouths.

    dwb:

    but the asset price level upon which the debt was borrowed is a function of the nominal gdp path.

    No, it’s not. NGDP could rise by way of increased consumer spending, and unchanged nominal investment, which will prevent asset prices from rising (unless the supply of them fall of course).

    when ngdp path drops, so does the asset price (the debt does not). the incentive to default persists until all the debt contracts are worked out at the new price level. You can do this the easy way (return ngdp back to trend) or the hard way (defaults). once the asset price level resets, there is some price at which demand returns.

    The notion that there is a direct relationship between aggregate spending and asset prices is the same nonsense as the notion that there is a direct relationship between aggregate spending and employment.

    If NGDP falls, then it might be due to a reduction in consumption spending, with unchanged investment spending.

    Your seemingly easy solution to debt problems ignores the fact that in order to maintain NGDP spending, in a context of an increasingly stressed capital market, inflation of money has to accelerate.

  52. Gravatar of Ron Ronson Ron Ronson
    21. May 2012 at 17:52

    I have a a question about the the “super-neutrality of money”

    Doesn’t “super-neutrality of money” depend upon how money is fed into the economy ? If money is given away in an economy in equilibrium to random individuals on a once off basis I can see that (although those individuals would gain a short term benefit) eventually the economy would return to pretty much the same equilibrium as before but with higher prices. However if the money supply grows by 5% per year for ever via CB creation of new money which enters the economy via the loan market would that not (even if the CB tells everyone in advance what it is planning to do and everyone factors that into their plans) create a different kind of economy (with a larger banking sector and more debt) than would have existed without this money supply growth via these means ?

    BTW: I’m not a Austrian or an MMTer.

  53. Gravatar of HankB HankB
    21. May 2012 at 17:59

    Dan,

    There’s nothing confusing about your position at all. You want the government to employ twice as many employees as it currently does. We all know the MMT position. It’s called statism. Americans are very familiar with this position and they rejected it a long time ago. Maybe you’re better off trying to impose this ideology in some different country?

  54. Gravatar of dwb dwb
    21. May 2012 at 18:06

    ” No, it’s not. NGDP could rise by way of increased consumer spending, and unchanged nominal investment, which will prevent asset prices from rising (unless the supply of them fall of course).”

    of course, theres equivalent methods to compute gdp: income and.expenditure approach.

  55. Gravatar of Major_Freedom Major_Freedom
    21. May 2012 at 18:34

    dwb:

    of course, theres equivalent methods to compute gdp: income and.expenditure approach.

    You misunderstand. There are income and expenditure equivalents with consumption spending, and there are a separate income and expenditure equivalents with investment spending.

    NGDP could go up by way of consumer spending increasing while investment spending is unchanged, which will increase incomes and expenditures on the side of consumption only.

  56. Gravatar of ssumner ssumner
    21. May 2012 at 18:46

    123, The Minsky cycle won’t do much damage if we have NGDPLT

    Greg, Superneutrality of money is now quite mainstream (Fisher effect, natural rate hypothesis, etc.)

    Hank, Whenever I think I’ve understood MMT, they tell me I have it all wrong. I’ve given up.

    Greg, I don’t know much about Canada, but I’d guess it was a mixture of two factors:

    1. A slowdown in NGDP growth.
    2. A big real shock (the US recession.)

    W. Peden, Thanks, that information is very useful. Other readers interested in Friedman’s thoughts should take a look.

    Ralph, Statements like “loans create deposits,” while not necessarily wrong, are so simplistic as to be almost meaningless. Unless all one means is that at the instant one receives a loan, one is generally credited with a bank deposit at the same bank that made you the loan. Of course everyone always knew that.

    anon, The interwar period suggests that only monetary policy can fix the imbalances in Europe.

    Dan, In another thread you were pitching the RBC line that nominal shocks don’t have real effects. And now you are a MMTer?

    Patrick, I can’t imagine what Friedman would have thought of that. And at the University of Chicago!

    Adam, I could see that argued either way. Just as you could argue either way as to whether new and old Keynesianism were the same. But certainly MM and old Keynesianism are not the same.

    Fernando, The key is changes in the stock of currency. People have a limited demand for currency, so when more is injected (permanently) you get inflation.

    GMC, I suppose, but you could certainly have a short to medium run NGDP target. Remember that the central banks completely dominated the global gold market at that time (it’s much less true today.)

    Tommy Dorsett, Excellent points.

    Morgan, I’d prefer some catch-up, but it’s hard to know how much difference it would make. It’s certainly worth doing.

    anon/portly, Hmmmm, how about the Fisher effect? Or the natural rate hypothesis? Inflation targeting? Balassa-Samuelson effect? Lucas critique?

    Market monetarism? 🙂

    PeterN, You are missing the elephant in the room. It’s not a zero sum game. It’s not a fight between lenders and borrowers. It’s a question of how we put the millions of unemployed back to work. As long as they are out of work living standards must fall sharply. If they are producing useful goods and services living standards do not need to fall nearly as sharply.

    Ron, No, it makes no difference how the money enters the economy, at least within reason. If the central bank buys gold, or buys T-securities, you get roughly the same effect. And yet in buying gold the money isn’t entering through the loan market.

  57. Gravatar of dwb dwb
    21. May 2012 at 18:50

    “You misunderstand. There are income and expenditure equivalents with consumption spending, and there are a separate income and expenditure equivalents with investment spending.

    NGDP could go up by way of consumer spending increasing while investment spending is unchanged, which will increase incomes and expenditures on the side of consumption only.”

    no: http://en.wikipedia.org/wiki/Gdp#Determining_GDP

  58. Gravatar of OhMy OhMy
    21. May 2012 at 18:55

    Scott,

    “Consider a monetary policy that has no impact on real bank assets or liabilities. If it created higher inflation, then nominal deposits, nominal loans, and nominal reserves would all rise proportionately.”

    This doesn’t even mean anything. Loans are nominal liabilities for borrowers. If you borrowed 1M, you need to repay 1M. If inflation happens to rise, your obligation stays constant in nominal terms and drops in real terms. There is no inflation or monetary policy that would have no impact on real assets and liabilities. The money neutrality goes out of the window, not no mention super-duper-neutrality.

    “In that scenario it makes no sense to talk about loans causing deposits or deposits causing loans.”

    Not sure what this means. Deposits are created by someone getting a loan, inflation or monetary policy has nothing to do with it. How would a deposit cause a loan? (would the loan recipient be chosen randomly?) Only in a textbook, maybe.

  59. Gravatar of Major_Freedom Major_Freedom
    21. May 2012 at 19:37

    dwb:

    no: http://en.wikipedia.org/wiki/Gdp#Determining_GDP

    Nothing in this link refutes what I said. C can go up and I can remain unchanged with inflation.

    It’s telling that you get your knowledge from wikipedia rather than journal papers and books. It explains a lot.

  60. Gravatar of Greg Ransom Greg Ransom
    21. May 2012 at 20:26

    Right. Sure. But what I’m asking is your memory of Friedman’s case and claims and arguments and assumptions.

    “Greg, Superneutrality of money is now quite mainstream (Fisher effect, natural rate hypothesis, etc.)”

    But of course, the “mainstream” insists on all sorts of implausible and non-explanatory stuff for all sorts of reasons internal to the sociology and reward structures etc of the profession.

    And the fact that the “mainstream” embraces something gives strong presumptive reason to doubt the scientific soundness of the assumption and the explanatory strategy in which is is embedded.

    In other words, the burden of justifying the assumption and the explanatory strategy in which it is dependent INCREASES due to the fact that its another assumption the profession mindlessly propounds the notion, when it advances so many unsound, unhelpful and implausible assumptions embedded in a patently failed — and essentially contested — explanatory strategy.

  61. Gravatar of Morgan Warstler Morgan Warstler
    21. May 2012 at 21:26

    Scott, that’s nice, but if it is hard o know how much difference it would make, WHY???

    I swear, I’m the only person who ever digs into the nooks and crannies and games out this shit.

    If you can’t even estimate the timescale improvement from 11% make-up vs none, you CANNOT argue for makeup. We know the down side of the inflation bump, we know it for sure – if NGDPLT with no makeup gets us to the same place in 18mos, then screw the make up.

    —-

    HankB, WAIT.

    MY PLAN for guaranteed income in near perfect:

    http://pegobry.tumblr.com/post/21427545322/morgan-warstler-via-steve-randy-waldman

    to quote:

    “Fascinating. I’m trying to think of downsides, and yet I can’t….

    Honest question””does anybody see any problems with this idea?”

    I write totally new policy that ruins liberals day.

    Watch me prove it!

    Dan will NOT under any circumstances discuss out loud my plan as it destroys his entire rational for being.

    Oh, Dan!!!!!! C’mon old man, explain why we shouldn’t paypal that GI, and Auction the Unemployed.

    I’ll put 30M new people to work, solve poverty, and do it always at a profit.

    Dan hates profit, because whenever anyone make a profit, an falls down the status ladder.

  62. Gravatar of Prakash Prakash
    21. May 2012 at 22:41

    Hi Scott,

    I second Ron’s question and I don’t think you have answered it correctly. The entire Market Monetarist proposal is dependent on clear rules and clear signalling. Hence, it will be very necessary for the Central bank to lay out very clearly, before the need arises, what is it going to buy and in what order.

    However, once that list is public, the entire structure of the economy changes. The assets that are at the top of that list become more valuable because it is known that they will hold their value in a recession. They become the long term choice for holding wealth. Out goes the neutrality.

    The only way to maintain neutrality would be to randomly buy assets (which would be a huge boost to securitization of everything) or randomly give the money to people using a lottery. The federal lottery was Interfluidity’s idea, not mine, but the idea seems to be deeper if it is arising in different minds from fundamental analysis.

  63. Gravatar of W. Peden W. Peden
    22. May 2012 at 01:25

    As far as a bibliography for Friedman’s views on the neutrality/non-neutrality of money goes-

    1. The place to start is his Nobel Prize lecture “Inflation and Unemployment”, which contains both a quantity theory position and the accelerationist hypothesis.

    2. “The Role of Monetary Policy” is the natural (excuse the pun) follow-up, because “Inflation and Unemployment” is an expansion on this article.

    3. The book Money Mischief contains a very readable statement of Friedman’s views on money neutrality.

    4. Monetary Trends in the United States and the United Kingdom contains the most technically advanced statements of his views which he presented, as far as I know.

  64. Gravatar of Bill Woolsey Bill Woolsey
    22. May 2012 at 03:46

    I think that it is the super neutrality of money that is in question, not the superneutrality of inflation.

    I think superneutraility is almost certainly false (and I think that is the standard view.)

    But if you mean, does a more rapid growth of the quantity of money lead to _a_ lower nominal interest rate, a lower unemployment rate, a greater growth rate (or even growth path) of real output, or _a_ lower real interest rate, then almost certinaly not.

    If paper currency is just issued by the goverment and spent, then the real balances depend on the rate of money creation and the revenue collected by the money issuer depends on money creation. The revenue has a “laffer curve” type relationship to growth rates, and presumably the money is spent in some particular way. Are other taxes lower? That will have an effect on the allocation of resources. Is there more government spending? That will effect the allocation of resources.

    And, of course, what happens when we move negative? Does a -1% rate of growth in the quantity of money have no real effect compared to a -20% growth rate?

    What is superneutrality? Well, we don’t expect that shifting from a 5% growth rate in the quantity of money to 10% will result in perstently lower real, much less nominal, interest rates. We don’t expect a permanent shift in the allocation of resources from consumption to investment. We don’t expect a permenant increase in capital accumulation and productive capacity.

    This is the Austrian theory. The problem is that many, if not most Austrians, don’t see this.

    The mainstream view is that if there is some change in the allocation of resources in the short run with the adjustement from 5% to 10% money growth, then they will end up being reversed. And then the economy will continue with 10% money growth and 5% more price inflation. The real interest rate and the allocaiton of resources, and the capital stock, and the growth path of potential output will all be about where they would have been anway.

    This is an implication of Mises theory that to maintain malivestments, it is necessary to accelerate inflation. Well, suppose you don’t. Suppose you just keep it up at the same old rate, and let the real interest rate rise and the malinvestments get liquidated?

    Now, if we switch over to abstract perfect superneutrality, then there are any number of reasons why that is false. But it isn’t that more rapid money growth always requires lower real interest rates which impacts the allocation of resources from consumption to investment, and results in more accumulation of capital goods. No, it could be that the govenrment prints money to buy tanks and so there is a shift in the composition of production from everything else to tanks. And this shift could be maintained as long as the govenrment wants to allocation the inflation tax in that way.

  65. Gravatar of Bill Woolsey Bill Woolsey
    22. May 2012 at 04:02

    Scott:

    Isn’t the central point of your argument that with a gold standard it really doesn’t make sense to shift the inflation rate?

    We had a regime of 2% inflation. Let’s make it 5% inflation. Or 10% inflation?

    If you can do that, then you don’t have to worry about liquidity traps. You can always make the lower bound of the market rate as negative as you like.

    With a gold standard, this would require changes in the rate of devaluation. I suppose a “gold standard” where you plan to devaluate periodically isn’t really a gold standard at all.

    Now, do you favor giving central bankers the discretion to shift the inflation rate? Or the growth rate of nominal GDP?

    Personally, I favor a 3% target for nominal GDP and expect that to generate stable prices for the most part. I don’t see this as just advice for central bankers, but rather a regime that will tie their hands–just like keeping the price of gold fixed tied the hands of central bankers in the past.

    Does that make interwar macro more relevant to me?

    Wheras, for you, it wouldn’t be relevant since you would be open to a once and for all decision to go with 7% nominal GDP growth so that governments can issue zero-interest hand-to-hand currency on demand and central banks can gauge their open market operations by movements in very short and safe nominal interest rates?

    I don’t see that.

  66. Gravatar of Bill Woolsey Bill Woolsey
    22. May 2012 at 04:21

    Harless claims that market monetarism is a varient of New Keynesian economics.

    I suppose this would be based on the common view that prices are not sufficiently flexible to make nominal stability irrelevant?

    The implication is that the focus on interest rates is not essential to New Keynesian macro.

    On the bright side, it might make it easier for New Keynesians to come our way.

  67. Gravatar of J.V. Dubois J.V. Dubois
    22. May 2012 at 04:34

    Bill: Since you prefer 3% NGDP target which should roughly translate into 3% RGDP growth and zero inflation, what is your take on inefficiency caused by wage stickiness? And now I mean wage stickiness not only during depressions, but also in normal times. Zero inflation could very well make sectoral shifts withing the economy harder resulting in permanently higher unemployment compared to slight inflation.

    The only benefit I see from zero inflation is its impact on capital gains taxes, possibly some gains due to menu costs and shoeleather costs. These gains seem to be negligible nonetheless and they can easily bu trumped by gains from inflation tax on cash that is mostly used by semi-legal or outright criminal organizations.

    So in short, the debate of zero inflation vs low inflation seems to break down into sticky-wages-coordination story (inflation making structural shifts easier) vs DWL due to “underinvestment” in long-term projects with safer but low yields (basically long–term development). Do you have any interesting sources that can quantify these effects? I would am honestly very interested.

  68. Gravatar of Lars Christensen Lars Christensen
    22. May 2012 at 06:09

    Bill, I agree with Andy to the extent that New Keynesians give up the focus on interest rates in the monetary transmission mechanism. However, Market Monetarists are after all monetarists when it comes to the transmission mechanism. You and I both strongly believe that interest rates is just one of many channels through which monetary policy works. Scott obviously have the same view.

    However, some would claim that all models that assume sticky prices are keynesian – that would of course make David Hume and Leland Yeager keynesian. That is obviously nonsense.

    Some New Keynesians obviously realise that monetary policy is what determines NGDP. However, if you have that view there is not much Keynesian to being New Keynesian.

  69. Gravatar of Russ Anderson Russ Anderson
    22. May 2012 at 06:14

    Scott wrote “You certainly won’t find anything like that in Keynes, as far as I know he never once discussed the idea of using central bank policy to permanently raise the trend rate of inflation.”

    How about when Keynes wrote “The stimulation of output by increasing aggregate purchasing power is the right way to get prices up; and not the other way round.” and “But in a slump governmental Loan expenditure is the only sure means of securing quickly a rising output at rising prices.”? An Open Letter to President Roosevelt in 1933 (http://newdeal.feri.org/misc/keynes2.htm)

    The context is paragraph 6, where Keynes discusses attempts by the Roosevelt Administration to raise prices. “Now there are indications that two technical fallacies may have affected the policy of your administration. The first relates to the part played in recovery by rising prices. Rising prices are to be welcomed because they are usually a symptom of rising output and employment. When more purchasing power is spent, one expects rising output at rising prices. Since there cannot be rising output without rising prices, it is essential to ensure that the recovery shall not be held back by the insufficiency of the supply of money to support the increased monetary turn-over. But there is much less to be said in favour of rising prices, if they are brought about at the expense of rising output. Some debtors may be helped, but the national recovery as a whole will be retarded. Thus rising prices caused by deliberately increasing prime costs or by restricting output have a vastly inferior value to rising prices which are the natural result of an increase in the nation’s purchasing power.”

    And in paragraph 7, “But too much emphasis on the remedial value of a higher price-level as an object in itself may lead to serious misapprehension as to the part which prices can play in the technique of recovery. The stimulation of output by increasing aggregate purchasing power is the right way to get prices up; and not the other way round.”

    Which leads to Keynes prescription in paragraph 8, “Thus as the prime mover in the first stage of the technique of recovery I lay overwhelming emphasis on the increase of national purchasing power resulting from governmental expenditure which is financed by Loans and not by taxing present incomes. Nothing else counts in comparison with this. In a boom inflation can be caused by allowing unlimited credit to support the excited enthusiasm of business speculators. But in a slump governmental Loan expenditure is the only sure means of securing quickly a rising output at rising prices. That is why a war has always caused intense industrial activity. In the past orthodox finance has regarded a war as the only legitimate excuse for creating employment by governmental expenditure. You, Mr President, having cast off such fetters, are free to engage in the interests of peace and prosperity the technique which hitherto has only been allowed to serve the purposes of war and destruction.”

    Now one can argue that Keynes was trying to fight deflation, which was certainly a big concern in 1933, not create inflation, but I claim they are the same thing. Keynes wanted to permanently raise the trend rate of inflation (out if deflation) and do it the right way, by increasing AD.

  70. Gravatar of Negation of Ideology Negation of Ideology
    22. May 2012 at 06:21

    Peter N –
    “The mess in Europe is a dispute between rentiers who feel cheated out of their expected real returns, and debtors who lack the resources to service the debt.”

    Ok, but a thing is only worth what it’s worth. Those creditors can only get the value that the debtors can pay. That is a tautology. Let’s say at the time they freely made the loans in Euros, the Euro was expected to be worth 1/15 trillionth of Eurozone GDP when the loan came due. To make it simple, lets say Eurozone NGDP falls in half – so a Euro is worth 1/7.5 trillionth of GDP. The average nominal income is obviously half what was expected. Either an unusually large number of creditors are going to have to take haircuts, or the value of the Euro is going to have to return to what was expected when they made the loan(1/15 trillion). That is math, not ideology.

    Ron Ronson –
    The Fed mostly creates money by buying Treasuries, not through the loan market, the 2008 crisis was unusual. Since all citizens are liable for the national debt, everyone is treated equally by that process.

  71. Gravatar of 123 123
    22. May 2012 at 07:47

    Scott: “The Minsky cycle won’t do much damage if we have NGDPLT”

    If we switch to NGDPLT, Minsky expansion would continue, and debt/NGDP ratios would expand. As a result, Minsky cycle would do lot of damage when we will have triple levels of debt.

  72. Gravatar of Mike Sax Mike Sax
    22. May 2012 at 07:54

    “Fascinating. I’m trying to think of downsides, and yet I can’t….

    Honest question””does anybody see any problems with this idea?”

    Morgan before we get into problems let me just say I at least have suspciouns about the idea. This is reasonalbe you should always think critically. As you and I don’t seem to share the same goals, objectives or values it’s natural.

    However I think a good place to start in answering Steve’s question is this: how is what you are asking really so different than MMT? I mean your GI is very similar to JG is it not? While you want only private employers in the GI, the JG doesn’t only envision goverment workers. In fact there are three types of JG workers-yes some would work for the government but some will like in the GI work in the private sector and some in the nonprofit sector.

    For now that’s a good way to start though. As your GI and the MMT JG are strikingly similar conceptualy where’s the difference? Why are you opposed to JG? How do JG and GI really differ?

  73. Gravatar of Major_Freedom Major_Freedom
    22. May 2012 at 07:56

    Bill Woolsey:

    But if you mean, does a more rapid growth of the quantity of money lead to _a_ lower nominal interest rate, a lower unemployment rate, a greater growth rate (or even growth path) of real output, or _a_ lower real interest rate, then almost certinaly not.

    The Fed lowers the fed funds rate by increasing bank reserves, not decreasing bank reserves. Yes, in order to hold the wider array of interest rates down, the Fed has to accelerate the increase in reserves, but that has the inevitable outcome of destruction of the currency, and so they always choose saving the currency and letting interest rates rise, which exposes the malinvestments that initially depended on lower interest rates.

    What is superneutrality? Well, we don’t expect that shifting from a 5% growth rate in the quantity of money to 10% will result in perstently lower real, much less nominal, interest rates.

    Correct. Only accelerating inflation is capable of keeping rates down, but only for a time of course, since accelerating inflation cannot last forever.

    We don’t expect a permanent shift in the allocation of resources from consumption to investment. We don’t expect a permenant increase in capital accumulation and productive capacity.

    This is the Austrian theory. The problem is that many, if not most Austrians, don’t see this.

    Most Austrians know constant growth money supply inflation can only engineer a boom, but it will bust if inflation of money does not accelerate. From then on, no boom is possible.

    Be that as it may, it does NOT prove the simplistic super-neutrality of money doctrine. There will still be real effects on the economy:

    There will still be a reduction of output from what otherwise would have been possible had there been no money printers and no redirections of wealth, since those who benefit from the new money first, typically the money printers, do not produce anything in order to earn the money they spend. For example, the employees of the Fed who receive interest from government debt do so by way of buying debt with unearned money. Of course they give most of the money back to the Treasury, but it’s less “expenses” and a 6% dividend. THAT money generates gains for the Fed at other people’s expense.

    The mainstream view is that if there is some change in the allocation of resources in the short run with the adjustement from 5% to 10% money growth, then they will end up being reversed. And then the economy will continue with 10% money growth and 5% more price inflation. The real interest rate and the allocaiton of resources, and the capital stock, and the growth path of potential output will all be about where they would have been anyway.

    Be accurate. They will be specifically less, because of the permanent sunk cost associated with malinvestment and wasting of resources. A wasting of capital permanently lowers the future trajectory of future growth in a compound interest like manner. For example, if we start with 100 capital, and we maximize technological progress such that we cap maximum growth at 10% per year, then in year two we could have 110, year three 121, and so on. If on the other hand capital is wasted, then we start with say 90. The same 10% growth would get us only 99 in year two, 108.9 in year three, and so on. The future growth path will forever be less than it otherwise could have been. And not only that, but as the years go by, we deviate more and more away from what could have been.

    As an analogy, if there never were central banks, and there never were credit expansion, and the world started capitalism in the year 1000 AD. Then you and I might have been living the way the Jetsons lived, or beyond. But because past humans squandered wealth, because the boom bust cycle destroyed trillions and trillions of dollars worth of capital over the decades, we have 40,000,000 people on food stamps and real wages that have not gone up since 1971.

    But people are working aren’t they! That’s the whole end goal of inflation, isn’t it! To keep people moving. Doesn’t matter what, just keep them moving and working while the state extracts wealth and while the Fed wastes wealth.

    This is an implication of Mises theory that to maintain malivestments, it is necessary to accelerate inflation. Well, suppose you don’t. Suppose you just keep it up at the same old rate, and let the real interest rate rise and the malinvestments get liquidated?

    Then we will be left with the non-neutral effect of wealth redistribution, and reduction of total production from what it otherwise would have been had everyone earned the money they spent.

    Now, if we switch over to abstract perfect superneutrality, then there are any number of reasons why that is false. But it isn’t that more rapid money growth always requires lower real interest rates which impacts the allocation of resources from consumption to investment, and results in more accumulation of capital goods. No, it could be that the govenrment prints money to buy tanks and so there is a shift in the composition of production from everything else to tanks. And this shift could be maintained as long as the govenrment wants to allocation the inflation tax in that way.

    The Austrian theory is specific about inflation bringing about temporal reallocation of resources by entering the economy through the loan market first. Inflation financed government spending does not bring about the boom bust cycle effects according to the Austrians.

  74. Gravatar of Greg Ransom Greg Ransom
    22. May 2012 at 08:01

    Thanks for the helpful comments, Bill.

  75. Gravatar of ssumner ssumner
    22. May 2012 at 08:15

    OhMy, Monetary policy has nothing to do with the nominal amount of deposits? Are you joking?

    Greg, He made the standard assumptions about wages and prices being flexible in the long run, leading to the neutrality of money. Obviously that’s an approximation, he discussed second order welfare effects in his “Optimum Quantity of Money” paper.

    Morgan, I no longer call for making up the entire 11%. If we made up a smaller percentage, growth would be higher, but no one knows how much higher.

    Prakesh, You said;

    “I second Ron’s question and I don’t think you have answered it correctly. The entire Market Monetarist proposal is dependent on clear rules and clear signalling. Hence, it will be very necessary for the Central bank to lay out very clearly, before the need arises, what is it going to buy and in what order.”

    What makes you think they’d have to buy any assets? In any case, I’ve always recommended that they buy T-securities. The rest of your comment is wrong, the Fed would buy such a trivial amount of T-securities that it would have no significant impact on their value under a market monetarist regime. And if it did, so what?

    Interfluidity’s posts are based on the mistaken impression that market monetarism would require the Fed to buy lots of assets. The actual purchases would be so small that any non-neutrality wouldn’t even be second order effects, it’d be fifth order effects.

    Bill, You said;

    “I think superneutraility is almost certainly false”

    So do I, indeed all economic theories are false. The question is which of them are close enough to being true that they are USEFUL, at least for certain purposes.

    I agree with you that 3% NGDPLT is better than 7% NGDPLT, it’s just that 7% NGDPLT, is better than what we have now.

    JV, That’s a good point.

    Lars, I agree about transmission mechanism, but I would add that NKs use ratex, which in my view is an important difference from old Keynesianism.

    Russ, I’ve read a huge amount of Keynes’s writings, and I never once saw him discuss using monetary policy to adjust trend inflation. The quotes you provide clearly called for an increase in the price level, not trend inflation. In those days it was called “reflation” and had a very specific meaning. Keynes was very clear on that distinction–he strongly opposed fiat money. That’s why he denied the empirical relevance of the Fisher effect.

    123, No, as long as NGDP is stable, debt problems don’t spill over into the real economy, they simply redistribute wealth. And I doubt NGDLT would significantly affect the debt ratio. I can’t imagine someone saying “Great, we have NGDPLT, I’m going out and triple the ratio of my debt to my income.”

  76. Gravatar of Bill Woolsey Bill Woolsey
    22. May 2012 at 08:42

    I doubt trend inflation will lower unemployment in the long run.

    That is, the greater the number of people that know that the plan is for inflation to be 2% or 1% or 3%, the more people will understand no wage increase is a pay cut.

    Second, how much of the sectoral change in labor markets involes layoffs? How much invovles changes in the rate of hires of new employees?

    But, even if creating inflation so that people whose wages stay the same implies real pay cuts does reduce layoffs in sectors where demand has fallen, is this a bad thing.

    Maybe those people should get new jobs.

    Why is it that nominal pay cuts are resisted? Maybe it is because when real wages are reduced people should go do something else.

    And, of course, is it right to set up a system based upon some kind of planned deception?

    To me, the entire approach seems like one of the benevolent despot constructing an economic order for the benefit of his subjects.

    Suppose the people are setting up a monetary regime for their own benefit. Would they set one up so that that they can deceive themselves?

    Finally, creating a regime where “cost of living” raises are normal, then there will be a natural tendency to provide cost of living raises when there is an adverse supply shock.

    We are setting nominal GDP growth, so that anyone whose wages stay the same will have their real wages drop 2% a year. We hope that they will be deceived by this and not realize this is a real pay cut. Also, we hope that when prices rise more than 2%, they won’t expect a higher cost of living raise along with their productivity based merit increase. No, they will undertand that his increase in inflation was due to some supply shock.

  77. Gravatar of 123 123
    22. May 2012 at 09:44

    Scott:”No, as long as NGDP is stable, debt problems don’t spill over into the real economy, they simply redistribute wealth. And I doubt NGDLT would significantly affect the debt ratio. I can’t imagine someone saying “Great, we have NGDPLT, I’m going out and triple the ratio of my debt to my income.””

    Many financials said the reverse in late 2008 “Gosh, NGDP is no longer stable, I wish we had 3 times less debt”.

    And even if NGDP expectations are stable, NGDP itself is fluctuating along the NGDPLT path. And the fluctuations increase when debt problems grow.

  78. Gravatar of Morgan Warstler Morgan Warstler
    22. May 2012 at 09:57

    Sax, the GI actually works.

    Because it auctions the subsidized to the private sector:

    1. It pushes down the price level, particularly in beat up areas (the poor get more for their money).

    2. It makes huge savings at state and local govt. because the state can now hire low cost private sector firms (full of subsidized labor) to replace expensive public sector jobs.

    So the parks are now clean, schools have janitors and lunch ladies BUT the public sector isn’t some vast self-interested union due paying tool of the Democratic party.

    So people LIKE GOVT. Everyone is working for a real demanding boss in the private sector, so everyone like each other more – trust improves.

    3. We have a method of moving all entitlements into a system that requires work directed by the market.

    ——–

    Sax, it is pretty simple… if you want to increase the quality of life of the folks at the bottom:

    1. you make them work for a self-interested party
    2. you reduce the prices of things they actually spend their money on
    3. you reduce the cost of delivering the public goods that they enjoy
    4. you make sure that they have enough of a subsidy to cover their nut
    5. you do it in a frictionless way that rewards effort, and minimizes cheating with both effective penalties and forgiveness.

    Imagine 100 unemployed, where 20% are lazy…

    My system means that quickly the lazy are VISIBLE, and that they are surrounded by 80% now employed and improving their own lot.

    Ther eis very little place for the 20% to hide.

    Now when you get kicked off the dole for 6 weeks, you have nothing, and when you come back, in week one you can bee back in the systems good graces.

    Slowly the % of lazy goes down. And at the same time, we as a society become far less resentful of the unemployed… it is a far smaller number now.

  79. Gravatar of J.V. Dubois J.V. Dubois
    22. May 2012 at 10:31

    Bill: Hmm, let me say my view. Wages are downward rigid with zero having a prominent spot there as shown in this now famous graph: http://economistsview.typepad.com/economistsview/2012/04/evidence-of-nominal-wage-rigidities.html

    And now we already have 2% inflation anchored for decades. To me this seems like pretty convincing argument that labor markets do not clear. It may have perfectly rational grounds and this market imperfection is just small downside to otherwise very beneficial institutional arrangement. The point is – can we do something about it so that we mitigate this downside? I think it does.

    PS: just another note – what would you think if we start living in a world with stagnating or declining RGDP? There are all kinds of risks starting from slowing pace of innovation, demographic crisis and all kinds of supply side reasons such as climate change or resources being scarcer etc. So in such a world would you still prefer strict 3% NGDP path even if it would consist only from inflation?

  80. Gravatar of dwb dwb
    22. May 2012 at 10:41

    “And now we already have 2% inflation anchored for decades. To me this seems like pretty convincing argument that labor markets do not clear. ”

    why is that?

  81. Gravatar of Morgan Warstler Morgan Warstler
    22. May 2012 at 11:30

    J.V. Dubois,

    My GI plan clears labor markets in less than a year.

    When policies are created that CLEAR MARKETS markets will clear.

    To beat my GI plan, you have to argue auctions don’t work.

    You DO NOT get to cheer / support / promote policies that create sticky wages, and then insist wages are sticky.

    Intellectual honesty FTW!

  82. Gravatar of Major_Freedom Major_Freedom
    22. May 2012 at 11:57

    ssumner:

    So do I, indeed all economic theories are false. The question is which of them are close enough to being true that they are USEFUL, at least for certain purposes.

    Wow. What a revealing couple of statements that is!

    All economic theories are false? How do you know that unless you had some standard of truth by which you subject all economic theories to? You can’t say anything is false without tacitly claiming to know truth. False makes no sense without truth. So what do you know is true that makes all economic theories false?

    I know true economic theories. Not many, but I do know them. For example, the law of opportunity costs. No matter what I do, no matter what my actions are, the law of opportunity costs will apply to my actions. If I engage in action trajectory X, then it is impossible that I take all other action trajectories at that time. For example, if I drive to the grocery store, it is impossible for me to also drive to the baseball park. I am not a God. I cannot do everything possible at once. I am a temporal actor. This is the reason why humans economize. It’s why you are even studying economics. If humans didn’t act, if we could do all things at once, there would be no economic science at all.

    You have the job you do because what I know is true about economics, is in fact true.

    The law of opportunity costs is irrefutable. Any attempt to refute it, the law of opportunity costs applies, and hence he who attempts to refute it will commit a performative contradiction.

    What is the basis for your belief that all economic theories are false? Is it the historical fact that every economic theory you are aware has been proposed throughout history, has eventually been falsified in some manner? If so, then that isn’t sufficient justification for your belief all economic theories are false, since it is possible you just haven’t been exposed to economic theories that cannot be falsified because they are true.

    You say economic theories can only ever get close to the truth so that they are useful, at least for certain purposes. But then how do you even know when a theory is useful or not? When it assists in accomplishing certain desired ends, correct? Well, if you take a step back and look at that from a “meta”-perspective, what is going on? You have an idea, you use means to achieve a desired outcome, and the usefulness of those means is a function of achieving your desired outcomes. The better the means serve to achieve your desired outcomes, the more useful they are, and you make the inference that the closer to “the truth” the ideas behind the means must be.

    What is your desired end? Is it to serve your interests or is it to serve other people’s interests, or both? I can tell you that your proposed means do not serve my desired ends, in fact it acts against my desired ends, so using your approach, I can say that your theory is further away from the truth than my theory.

    Would it surprise you that you are in fact presupposing an economic theory that must be considered true in order for your argument to be true? You’re talking about means and ends, of usefulness to you, in that the closer the means get to achieving your desired ends, the closer to the truth of things the theory behind the selection of those means must be. Well, Dr. Sumner, congrats, you just granted the validity of the fundamental edifice of the entire Austrian framework: Individual action. Underneath the occasional gold standard advocacy, the calls to abolish the Fed, and all other subjectivist desires, resides the objective, irrefutable core of Austrian economics.

    Strictly speaking, no Austrian can say the Fed ought to be abolished, or that government spending ought to fall. Austrian economics only tells us about the basic, I-beam fundamentals of human action, upon which all economic laws are grounded. Of course history is needed to fill in the concrete so that we can construct a building, but without the proper I-beams, constructing the building becomes a mess, and without historical data, Austrian economics is an empty shell.

    The problem with positivists is that they believe they can understand buildings and they believe they can construct them, without knowledge of I-beams. The building can topple over and over again, and they will keep blaming the type of concrete used, that if they only used a different type of concrete, the building might stay up. This is where Austrians come in. While we can’t predict what the building will look like, which by the way makes positivists consider Austrian economics a “useless” field of inquiry, we nevertheless know that unless I-beams are well understood, unless they are set up properly, the building is doomed to topple eventually.

    And we have been continued to be proven right. Market monetarists are convinced that they can at least keep the building upright if they only used the new and improved concrete that finally will prevent the building from toppling over. It’s never been tried before, and so they believe the Austrians have no way to argue against it, until it’s been tried. Sure, there might be some erosion around the edges here and there, the building might wobble, it might shake, but never again will we have to go through the pain of a toppled building, because this concrete is extra special. I mean just look at past examples of buildings. In every case, those buildings that didn’t topple, the concrete didn’t crumble, and those buildings that did topple, the concrete did crumble. Obviously the problem is the crumbling concrete! Forget about the support of the concrete. That lacks evidence.

  83. Gravatar of Links >:| « Increasing Marginal Utility Links >:| « Increasing Marginal Utility
    22. May 2012 at 12:50

    […] MMT & Internet Austrianism are stuck in the 1930s. […]

  84. Gravatar of Peter N Peter N
    22. May 2012 at 13:10

    @Negation Of Ideology

    I agree completely with the likelihood of getting a quart either into or out of a pint pot.

    “Either an unusually large number of creditors are going to have to take haircuts, or the value of the Euro is going to have to return to what was expected when they made the loan(1/15 trillion). That is math, not ideology.

    However this isn’t an either or problem. You can end up with something like both outcomes. First the Fisher debt cycle destroys the debtors. For them the real value of their Euro debt increases, which satisfies the second alternative. This results in defaults which fulfill the first alternative.

    That’s why Scott’s remark about it not being a zero sum game is true. It just doesn’t therefor follow that the only other possibility is a positive sum.

    If we look at the possible outcomes of future real returns against a current fair market value, giving each a value of + or – depending on whether it’s greater than fair value, there are 8 mathematically possible results, and I believe that all of them are economically possible.

    On the other hand, what is certain is that the creditors will never, in aggregate, get their full contractual returns either real or nominal.

    There’s an old joke about a a man asking a woman if she would have sex with him for $100 million. When she allows that she would, he asks her if she’ll do it for $10. She says “what do you think I am?”, and he answers, “We’ve already established that, we’re just negotiating a price.”

    When the creditors stop asking “What do you think I am?” and start negotiating their price, there can be a solution with a + + + return, though neither side will be in aggregate made whole. Until then the probability seems to be a – – – return, with serious collateral damage to the bystanders.

    Equating debt with sin, and treating repayment as a moral obligation is poor economics and poor religion, as well.

    “4 There were also that said, We have borrowed money for the king’s tribute, and that upon our lands and vineyards.

    5 Yet now our flesh is as the flesh of our brethren, our children as their children: and, lo, we bring into bondage our sons and our daughters to be servants, and some of our daughters are brought unto bondage already: neither is it in our power to redeem them; for other men have our lands and vineyards.

    6 And I was very angry when I heard their cry and these words.

    7 Then I consulted with myself, and I rebuked the nobles, and the rulers, and said unto them, Ye exact usury, every one of his brother. And I set a great assembly against them.

    8 And I said unto them, We after our ability have redeemed our brethren the Jews, which were sold unto the heathen; and will ye even sell your brethren? or shall they be sold unto us? Then held they their peace, and found nothing to answer.”

  85. Gravatar of Bill Woolsey Bill Woolsey
    22. May 2012 at 15:45

    I don’t favor nominal wage cuts. I favor keeping aggregate nominal spending growing on a stable growth path.

    Now, if there is a sectoral shift, the there is no presumption that prices and wages should fall and production and employment remain unchanged.

    Rather than trying to make it easier to avoid layoffs, it is better to have nominal GDP targeting rather than inflation targeting, so prices and profits can rise in the growing sectors without treating this as inflationary.

    Generally, firms in contracting sectors will first cut replacement hiring. This is appropriate. Then they will cut out raises. Instead of the trend 1% real wage growth, they can cut out the 2% cost of living growth. Then they lay off temps and new people.

    If there is no “cost of living” portion to cut, then the layoffs come sooner, but it may be that the real wages of more of the workers are protected. And maybe that is the point.

    You think everyone understands that the Fed is trying to cause 2% inflation? I don’t.

    It is going to be hard enough to move to a situation where adverse productivity shocks lead to a higher price level without this “the experts no better than you, inflation is good for you, approach.”

    Of course, I really just think it is immoral.

    If we live in a world where the long term trend for real wages is downward, then falling nominal wages is probably best. However, the aging population scenario doesn’t have that implication.

    Generally, if the trend growth rate for real GDP is different in the future and for a long time, then changing the target growth path of nominal GDP is OK. Not necessary. Not a great benefit. But not a great harm. But it should be implemented only in the future, say a date 5 years after the decision is made.

    Perhaps I am wrong, but I believe that the natural unemployment rate was lower during period of price level stability. So this notion that mild inflation results in permanently lower unemployment because the contracting sectors can easily cut real wages is just a theory.

    And, by the way, one that old Keynesians like because it justifies their long run phillips curve.

    You need to clearly separate any argument about sectoral shifts (where there are growing sectors creatng new jobs) from how the economy responds to slower growth in nominal expendenture on output.

  86. Gravatar of Bonnie Bonnie
    22. May 2012 at 22:48

    Here’s another problem with history, more evidence it is actually Bernanke pushing inflation targeting – from November 2005 Businessweek : http://www.businessweek.com/magazine/content/05_45/b3958607.htm

    “The biggest policy difference between Alan Greenspan and Ben S. Bernanke is over something known as inflation targeting. Greenspan is against it, Bernanke is for it…

    Why does Bernanke favor inflation targeting?
    He thinks that a more “transparent” Federal Reserve policy would promote stable, noninflationary economic growth by giving businesses and consumers more certainty about the future course of interest rates and inflation.

    Why is Greenspan against it?
    He thinks the Fed can control inflation without announcing a target rate. Plus, he worries that an announced rate would make it harder to respond flexibly and intuitively to a financial crisis or changing economic conditions. Greenspan recognized from a variety of subtle indicators in 1997 that rapid productivity growth was likely to curb inflation “” even though most conventional forecasts predicted accelerating inflation. He persuaded fellow Fed policymakers to not raise interest rates, allowing the economy to flourish.

    Does Bernanke admit that inflation targeting would decrease the Fed’s flexibility?

    No. He says that in a crisis the Fed would do whatever it takes to stabilize the economy. Frederic Mishkin, a Columbia University economist and longtime Bernanke collaborator, says that establishing credibility with the financial markets as an inflation hawk gives an inflation-targeting central bank more, not less, flexibility to tackle recessions.”

  87. Gravatar of J.V. Dubois J.V. Dubois
    23. May 2012 at 00:53

    Bill: Very good points, I will try to split my argument into two categories.

    1) Micro issues: this is the New Keynesian stuff – rigidities preventing labor markets to clear. And I think this is true even in good times. So yes, firms in sector that is not doing well may first try to cut replacement hiring, cut bonuses and freeze cost of living salary rises and all that. But if it is not enough, they prefer layoffs to nominal wage cuts even if they prefer salary freeze to layoffs.

    So even if those fired workers will be able to find a new job somewhere else (due to sufficient and stable nominal demand) the fact that some part of labor market is rigid spells some form of opportunity cost. Of course it may very well be that it is lower then the cost of inflation and that is why I am too not decided about this and why I find this as interesting topic.

    2) Macro issues: at the core of this lies the risk that lower trend inflation makes it more likely for monetary policy to become passively tight in face supply shocks.

    But in the end for me it is not really a “morality play”. We can try our best to estimate costs of low inflation compared to its benefits and they decide what is better for us.

    PS: Thanks for your time and comments. It really helped me think through some things.

  88. Gravatar of ssumner ssumner
    23. May 2012 at 05:27

    123, I don’t see why NGDP would fluctuate more with higher levels of debt, and I don’t see that debt levels would be much different with NGDP targeting than with IT. Maybe there’d be a slight difference, but nothing big.

    The 2008-09 example is not relevant, as almost no one favors deflation. So monetary policy was too tight from an IT perspective.

    The main cause of high debt is our tax system, which taxes debt much more lightly than equity. That’s where you’d want to address problems of excessive debt.

  89. Gravatar of Bill Woolsey Bill Woolsey
    23. May 2012 at 05:30

    I don’t think a low trend leads to passive tightening in the face of adverse supply shocks. The inflation rate still rises and real incomes–including wages and interest rates–fall.

    The advantage of the higher trend inflation rate is two fold.

    The labor market argument, which we have been discussing, is that in those sectors that are shrinking, contant nominal wages (no nominal raises) allow for a 2% per year cut in real wages. (assuming 5% NGDP target, 3% trend real GDP growth, and so 2% trend inflation.)

    Is this desirable?

    If we are too focused on a decrease in the growth path of nominal GDP, so that a decrease in the level of wages and prices is desirable, leaving output and employment unchanged, then problems with cuts in nominal wages is a problem.

    But real wages should be increasing for everyone. What sectoral shifts tell us is that people should quit working in one area and go somewhere else.

    Now, one way to signal this is for nominal wages to rise more slowly than in the rest of the economy. Or maybe just not rise at all. Or even to fall.

    Another way to signal this is for employers to not hire as many people with compensation systems that they plan to maintain over the long run or in more extreme cases, lay them off.

    Those who are not hired must get employment in other sectors. And in the more extreme cases, those who are laid off must get jobs in other sectors too.

    And, for the most part, that is what they need to do.

    Now, one can imagine that what “really” should happen is that nominal wages and prices should always adjust so that employment and output stay the same despite the shifts in demand. And then, employees disappointed in the lowerer real wages find other jobs in areas with higher demand (and higher real wages.) After finding the new job, they quit their old job. The firm losing the employees now produces less, and raises prices. And so they raise wages a bit. The firm getting the new worker produces more, lowers price, and lowers wages a bit. In the end, wages and prices are back where they started in both sectors, and the sectoral allocation of employment and the composition of output have changed.

    No unemployment at all.

    But real world market economies _DONT WORK THAT WAY_!

    Why is it sensible to try to make them work that way?

    In my view, when arguing for a monetary regime, you should take the point of view of the people that will live under it. What kind of regime would they want?

    We should not take the viewpoint of a paternalistic God, manipulating them for their own good.

    Exploiting money illusion seems wrong to me.

    Should we cause changes in the quantity of money when there is no change in the demand to hold it, so that government can spend more or people can borrow more? Hey, all that is necessary is an adjustment in prices and wages. No. These adjustments are difficult. Why cause this disruption?

    Should we adjust the quantity of money to changes in the demand to hold it? As we read on every post from MF, prices and wages can adjust to make the real quantity equal to the real demand. Yes, avoid excess demands and supplies of money. The price and wage adjustments are difficult.

    Should we adjust the quantity of money to keep the price level stable in the face of adverse supply shocks? I am sure that people like to avoid inflation. No. What is happening is that monetary disequilibirum is forcing other prices (and nominal incomes) to fall to offset the prices that rise. Monetary policy can’t just cause the prices of the goods that increased to fall again. What seems good is really not feasible. It is least bad to leave it alone. Even creditors, who might seem to benefit from one episode of price stabilizing, are going to be paid less real interest all the time because of these risks.

    Should we create a trend inflation rate so that real wages fall unless some positive action is taken (a cost of living raise) to keep them from falling, and then, hopefully, some kind of other raises to reflect real economic growth?

    The benefit is that if there is a decrease in demand for labor in one sector, real wages will fall, and there will be fewer layoffs. Instead, the lower real wages will cause employees to shift to areas with increased labor demand.

    It looks to me to be an effort to make the real market economy respond to shifts in demand with price and wage adjustments only and without layoffs. I don’t think that is what people want.

    As I said before, maintain strong employment growth.

    If you think of the economy as one of creative destruction, the notion that we should be trying to prevent firms from laying people off begins to look like a fool’s errand.

    Why is this a goal?

    It is only a goal if we are talking about an excesss demand for money where real balances need to adjust. Also, it would apply to aggregate supply shocks.

    This passive, secret, trend cut in real wages is wrong.

    The other argument is that the trend inflation rate generates a negative interest rate on hand to hand currency. This is beneficial to the issuers of that currency. If the natural interest rate becomes negative, but less than the trend inflation rate, there is no problem for the issuer of the issuer of the currency. With zero inflation, this is better for those using currency (and worse for the issuers,) and issuing currency becomes unprofitable if the natural interest rate is negative.

    I don’t favor a 2% trend inflation rate to make it so currency issue is always attractive to governments and that they are less likely to have a problem with issuing hand-to-hand currency when the natural interest rate is negative.

  90. Gravatar of J.V. Dubois J.V. Dubois
    23. May 2012 at 07:28

    First about the Paternalistic God argument – actually I having government (and even influential private organizations) acting like gods is unavoidable – not in Thaler’s “libertarian paternalism” way. Is government wrong changing time twice a year? If government can make policy where citizens select one of 3 options (no-choice is also a selection) are they also playing god if they make one of those choices as default one? If yes, then I see nothing wrong with this sort of paternalism. As long as government does not actively hide opportunities and choices from citizens in a really fradulent way I would tolerate such government for the sake of pragmatism.

    Inflation and macro story: Sorry, I really did not mean trend inflation – what I meant is that lower NGDPL target means less space for inflation volatility. If the economy faces large enough supply shock, low NGDP target would mean that larger part of relative price changes will need to occur via nominal price cuts. Basically the CB will respond to supply shock by creating additional demand shock.

    You already covered this effect in your post, but I do not understand your conclusion: “Monetary policy can’t just cause the prices of the goods that increased to fall again” I think this is not the case – higher available inflation (with higher NGDP target) does not mean that prices that fell should rise again – only that relative prices change (mostly) by different pace by which they rise.

    Employment and layoffs: Why should “our” goal be to minimize layoffs? Of course there could be social reasons – like impact of being fired/unemployed or less secure about your job on people’s happiness, self-worth or even impact on practical things like decisions to have children. But let’s not go down this road as it is too laden with normative judgements.

    My whole argument is that there is something strange happening on the zero level of wage increase. This reeks of “predictably” irrational behavior. We know that there are other cognitive biases like hyperbolic discounting, endowment effects etc. – and good government must take these things into account if they design policies. Because these biases don’t disappear just because government does not use them or thinks of them as amoral. The will be there for good or ill and I find it as job of economists to give advice exactly in these kinds of situations.

    It is like the question of what is “monetary policy” and what does it mean if monetary policy “did not change” or if it “does nothing”. People use money instead of barter. At that moment they just introduced some sort of monetary policy into their lives. Even if they are completely unaware that such thing exists.

  91. Gravatar of 123 123
    23. May 2012 at 09:09

    Scott:”I don’t see why NGDP would fluctuate more with higher levels of debt, and I don’t see that debt levels would be much different with NGDP targeting than with IT. Maybe there’d be a slight difference, but nothing big.”

    Higher levels of debt create additional risks. Eventually market price of risk increases, providing an incentive to postpone spending even when NGDP futures are pegged and markets expect that NGDP will speadilly return to trend after the recession.
    Under NGDPLT levels of debt would be much higher than under IT. There are two reasons for that. There is a ratex explanation – David Eagle had a guest post on Lars’ blog where he explained that NGDPLT means a much more efficient allocation of risks between debtors and creditors. And there is a Minsky learning story, where agents falsely learn that more debt is safe, and these beliefs are falsified during recessions. As recessions would be much rarer and milder initially under NGDPLT, we would get a huge buildup of debt.

    “The 2008-09 example is not relevant, as almost no one favors deflation. So monetary policy was too tight from an IT perspective.”
    This example was not about deflation per se, but it was just an illustration how lower levels of debt are optimal when monetary policy is not stable. As NGDPLT would mean a much more stable monetary policy than IT, optimal levels of debt would increase.

    “The main cause of high debt is our tax system, which taxes debt much more lightly than equity. That’s where you’d want to address problems of excessive debt.”
    It is just one of the causes, other cause is that equity is much riskier than debt.
    Taxes should be reformed along with TBTF support and deposit insurance. However, we would still see the growth of debt under NGDPLT.

  92. Gravatar of dwb dwb
    23. May 2012 at 09:45

    @123:
    “There is a ratex explanation – David Eagle had a guest post on Lars’ blog where he explained that NGDPLT means a much more efficient allocation of risks between debtors and creditors. And there is a Minsky learning story, where agents falsely learn that more debt is safe, and these beliefs are falsified during recessions.”

    higher debt levels do not follow from either (what is “too much”?). ultimately, debt payments as a share of income is what determines debt risk. To give an example (in a different world) suppose debt payment service we merely a fraction of income (so my mortgage was 20% of my income for thirty years). you can only take on debt service up to a certain level of income (because there are taxes, you need to eat and buy clothes, etc). In effect, the “principal” is fully flexible pro-rata share of gdp.

    Now, in the real world, debt service payments are *nominal* $x/mo, but the nominal payment itself is a function of the asset price and ngdp growth path. If my (nominal) income is y/month then i still can only afford 20% of nominal income. On a given stable ngdp growth path debt service payments cannot rise above a certain level as a share of income.

    The only difference is that with ngdp targeting, since debts are a function of the t=0 price level (ngdp path), you ensure it stays level.

    I don’t see how either of your arguments remove the basic income restriction on debt.

    And *actually* its quite the opposite from what you say: the whole idea of the risk sharing argument is that it makes it *much clearer* who is in the responsible camp (borrowed a small share of their income*) and who is not.

  93. Gravatar of GMC GMC
    23. May 2012 at 09:56

    Thank you, Scott. I thought that was the case, just wanted to make sure I was thinking about the situation properly.

  94. Gravatar of 123 123
    23. May 2012 at 10:06

    dwb, ever heard of negative-amortization NINJA loans?

  95. Gravatar of dwb dwb
    23. May 2012 at 10:11

    “ever heard of negative-amortization NINJA loans?”

    yeah, so what?

  96. Gravatar of 123 123
    23. May 2012 at 10:55

    dwb, debt service payments are negative in such loans…

  97. Gravatar of dwb dwb
    23. May 2012 at 11:23

    monetary policy does not cure stupidity.

  98. Gravatar of dwb dwb
    23. May 2012 at 11:59

    Just to be clear: suppose you took out a ninja loan praying that your income would rise (or home prices). Under ngdp targeting you would be wrong. under some other monetary policy you might be right. Conversely, if you took out a standard prime loan with 80% down, then if the fed lets ngdp drop you could be in the same bucket as the ninja guy.

    ngdp targeting does not cure stupidity, but as a lender it sure makes it easier to distinguish it from the other loans (thats the essence of the risk sharing argument).

  99. Gravatar of ssumner ssumner
    24. May 2012 at 06:03

    Bill, You said;

    “But real wages should be increasing for everyone. What sectoral shifts tell us is that people should quit working in one area and go somewhere else.”

    I disagree here. In the long run this is true, but there are many short run situations where temporary real wage cuts are better than migration. Currency devaluation in Greece right now (lower real wages) is better than mass unemployment causing workers to seek higher real wages in Germany. Some older workers may not want to retrain to new industries, just play out the string until they retire. Some workers would prefer to stay employed with lower real wages, while they search for new jobs that offer better prospects. Unlike you, I see the lower real wage caused by inflation as the actual market adjustment, whereas the sticky real wage caused by the zero bound plus low NGDP growth is a non-market wage.

    123, You are making lots of assertions that don’t seem plausible to me, and then not backing them up with persuasive evidence. I very much doubt the runup in debt during 2000-07 would have been much different under either system (IT or NGDP.) Indeed it’s not entirely clear which system we had. In any case, I don’t see why NGDP would be more unstable with higher debt levels. And finally, even if debt is a problem, the solution is to lower the tax subsidy, or even eliminate it.

    One other point, people tend to forget that for the average person, local shocks are 10 times more important than macro shocks. Local shocks don’t change under either system, so the incentive to run up debt isn’t very different. Now in an extreme case where you do a Great Depression every few years, then yes, there’d be less debt. But no one is calling for that. IT and NGDP are simply not that different.

    You said;

    “Taxes should be reformed along with TBTF support and deposit insurance. However, we would still see the growth of debt under NGDPLT.”

    I find that very implausible (I think the higher taxes on debt would greatly outweigh the slightly lower risk factor) and you don’t offer any evidence that my intuition is wrong.

  100. Gravatar of 123 123
    24. May 2012 at 07:13

    Scott,
    David Eagle has provided the explanation why debt works better under NGDPLT:

    http://marketmonetarist.com/2012/03/26/guest-post-central-banks-should-quit-kicking-them-while-they-are-down-by-david-eagle/

    Runup in debt during 2000-07 would have been different under NGDPLT as it wouldn’t have stopped in ’07, except for subprime.

    All in all, you underestimate the symmetry between labor and debt contracts. Both labor and debt contracts are sticky long term contracts, and both benefit greatly from NGDPLT.

    NGDPLT is very usefull, but people would take part of the benefits of NGDPLT in the form of higher debt levels. So you overestimate the NGDP stability benefits of NGDPLT, and underestimate financial sector supply-side benefits of NGDPLT.

    “In any case, I don’t see why NGDP would be more unstable with higher debt levels”
    Just take a look at the chart of VIX, it is correlated with macro volatility. Are you willing to sell VIX at the same price when debt levels double?

    “One other point, people tend to forget that for the average person, local shocks are 10 times more important than macro shocks.”
    Local shocks can be diversified away. NGDP shocks can’t. According to Fama, systemic risk is much more important than local risk.

    “(I think the higher taxes on debt would greatly outweigh the slightly lower risk factor)”
    Good example is the popularity of derivatives. They have no tax subsidies, but they have become very popular during the period of macro stability.

  101. Gravatar of dwb dwb
    24. May 2012 at 07:25

    “NGDPLT is very usefull, but people would take part of the benefits of NGDPLT in the form of higher debt levels.”

    I struggle with this: mathematically, debt mostly finances investment, which adds into in GDP. Now, perhaps there is some minor debt/equity preference shift, but that is a 1-time adjustment. Perhaps there is a minor adjustment in lending standards (that is also 1-time). But mathematically, how exactly does debt grow faster than ngdp holding lending standards constant?

    there might also be some demographic shifts regarding savings rates as retirees spend their assets, but again, not a monetary policy issue.

  102. Gravatar of 123 123
    25. May 2012 at 09:14

    dbw, yes, the ratex argument is telling us there will be a one time increase in debt level. This increase is likely to be very large, as NGDPLT would greatly reduce the systemic risk, so credit standards would be relaxed.
    Minsky argument is that there would be a continuous learning process with overshooting of debt levels.

  103. Gravatar of dwb dwb
    25. May 2012 at 09:25

    i hear what you are saying. “very large” is speculative, no one can observe the natural rate. plus, the Fed and OCC are not going to lighten up on capital standards just cause some theories say its so. regulators amd bank risk models womt ne convinced weve returned to great moderation level volatility for a long time.

  104. Gravatar of 123 123
    25. May 2012 at 10:01

    dwb, capital standards have nothing to do with debt/gdp ratios. Capital standards regulate relative risk of bank equity vs bank debt. Bank equity would grow on steroids if we switched to NGDPLT + tight capital regs, until a very high debt/equity would be reached.

  105. Gravatar of ssumner ssumner
    25. May 2012 at 12:12

    123, I agree that debt and wage contracts do better under NGDP targeting, I just don’t see much empirical evidence that the level of either type of contract would be much different under NGDP vs. inflation targeting. I’d expect roughly the same number of wage contracts, and roughly the same duration.

    No, local shocks aren’t diversified away. If my industry goes bankrupt and I lose my job, that’s a much bigger deal than most macro shocks.

    I see no evidence that growth in derivatives is much higher under NGDP than inflation targeting. Someone could argue the recent boom in derivatives was due to inflation targeting.

  106. Gravatar of 123 123
    25. May 2012 at 12:33

    Scott,
    the effect of NGDPLT would be much less visible in labor vs. debt markets, because the size of the population creates a natural limit for the number of workers. You can see the empirical evidence for debt in those countries where IT is so flexible that it is quite close to NGDPLT, for example, Australia.

    EMH and CAPM are telling us that local shocks can be diversified away, so only the systemic risk drives the ex-ante price of risk and asset prices. EMH and CAPM are teling you to diversify away your local risks, and in fact you are doing exactly that by investing in Asian stocks.

    Yes, one of the reasons derivatives boomed was Greenspan’s policy that was quite close to NGDP targeting.

  107. Gravatar of dwb dwb
    25. May 2012 at 12:51

    @123,
    capital standards act as a speed limit on aggregate lending.

    I understand all your points about risk sharing and diversification. “derivatives” though are just financial intermediation. again, i dont see the evidence for an “explosion” of aggregate debt: non-financial debt tracks real estate / commercial investment pretty closely. Financial debt mostly just reflects intermediation.

  108. Gravatar of 123 123
    26. May 2012 at 00:20

    dwb,
    capital standards are a limit on a bank debt/equity ratio, not a limit on debt aggregates.

    Financial intermediation costs would fall as a result of a lower systemic risk premium under NGDPLT.

  109. Gravatar of ssumner ssumner
    27. May 2012 at 11:10

    123, I don’t think the EMH tells us anything about how easy it is for an auto worker to diversify the risk of him losing his job. In any case, we know that people don’t diversify away from local risk, so aggregate risk is much less important for the average person.

  110. Gravatar of 123 123
    27. May 2012 at 11:35

    Scott,
    The main question is not how the autoworker is able to diversify his own personal risks. The question is how debt markets are pricing these risks. EMH and CAPM is telling us that holders of autoworker’s mortgage are able to diversify non-systemic risks, so autoworker’s personal problems and personal risks matter for the debt markets only to the extent they are correlated with the systemic risk.

    On the other hand, Robert Shiller’s dream is that autoworkers should hedge their auto-industry risks and the risks of their hometown real estate market. For this dream to come true, we need an AS miracle in the financial sector that could be provided by NGDPLT.

  111. Gravatar of Mielczarek Mielczarek
    17. September 2012 at 23:46

    Agree with “Ritwik” above. This is an excellent post!

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