I don't have an answer to that question. The politics of NGDP targeting doesn't make any sense to me. I don't understand it at all.
Central banks have to do something. They can't do nothing. Whatever would "doing nothing" mean? Let's make it really simple. There are three choices. At one extreme, the central bank can choose a horizontal AD curve, by targeting inflation or the price level. At the other extreme the central bank can choose a vertical AD curve, by targeting real output ("full-employment" output). And exactly halfway in between the central bank chooses a downward-sloping (rectangular hyperbola) AD curve, by targeting Nominal GDP.
NGDP equals the price level times real output. In logs, NGDP equals the price level plus real output. The growth rate of NGDP equals the rate of inflation plus the growth rate of real output. In logs, NGDP equals the price level plus employment plus labour productivity. The growth rate of NGDP equals the rate of inflation plus the growth rate in employment plus the growth rate in labour productivity. What more can I say? Any way you look at it, NGDP targeting is halfway between those who want the central bank to look only at inflation and those who want the central bank to look only at output (or employment).
So, if you line up those three different targets for monetary policy, with inflation targeting at one end, a full-employment target at the other end, and an NGDP target in the middle, which would be the right and left ends? The answer is obvious. I can't think of any right wing economist (or even any right-wing non-economist) who wants the central bank to make the AD curve vertical by targeting full employment output. Zero righties on that end of the spectrum. But I think there are still a few die-hard lefty economists (and lots more lefty non-economists) who never got the memo from Phelps, Friedman, or the experience of the 1970's, and who want a vertical AD curve. And there are many more moderate lefties who did get the memo but don't like inflation targeting because it doesn't pay enough attention to unemployment.
So, the horizontal AD curve (targeting inflation) should be at the right end of the political spectrum, and the vertical AD curve (targeting "full-employment" output) should be at the left end of the political spectrum. With NGDP targeting in the middle.
So this is what you would expect to see:
The righties should all be supporting inflation targeting or price level targeting.
The lefties who got the Phelps/Friedman/1970's memo should all be supporting NGDP targeting.
The lefties who didn't get the Phelps/Friedman/1970's memo should at least be supporting NGDP targeting as at least being a step in the right (i.e. left) direction and giving them half of what they want.
Yet NGDP targeting seems to be associated with right-of-centre economists, with some left-of-centre economists like Brad DeLong and Paul Krugman coming on board the righty train. I think I understand where Brad and Paul are coming from, and their position makes sense to me. But where are the rest of the lefties? Why aren't they the ones doing all the pushing for NGDP, trying to convince righties like Scott Sumner to come on board the lefty train? Why aren't the Canadian lefties at The Progressive Economics Forum the ones pushing for NGDP?
Plus, even if you ignore the stuff about the slope of the AD curve, lefties are supposed to be the ones pushing radical new ideas anyway. With righties defending the boring old inflation targeting status quo. The lefties seem more keen on targeting a 1% minority than 5% NGDP.
This doesn't make any sense to me at all. It should all be the other way around.
Worthwhile Canadian Initiative 
A bit off topic: I’m puzzled by why leftie economists are happy having private banks create money (i.e. engage in fractional reserve). Thomas Edison said that new money should be the property of the people, or words to that effect. You’d think that idea would be music to the ears of lefties. See last paragraph here:
http://www.primeronmoney.com/edisonandford.html
Ralph: I would tend to agree, but would re-phrase it like this: Lefties should want the government-owned central bank to have a bigger monopoly on money creation (or, you would think they would) so would be the ones pushing for 100% reserves..
Then you have the righties who want a lower inflation target which implies a bigger central bank, owning a bigger percentage of the assets of the economy!
Yep, there are lots of paradoxes here.
Nick – which begs the question – are you a leftie economist or a rightie economist? Or do you just enjoy blasting away the conventional wisdom whatever it happens to be?
(No need to reply, I’m off to get ready for class).
left prefers fiscal
monetary QE is last resort for Krugman and DeLong – they want huge QE because fiscal is lost to politics
and they are bootstrapping on NGDPT as a way to drawn attention to this – their objective is tactical QE moreso than NGDPT per se
besides, NGDPT itself achieves nothing that flexible inflation targeting can’t
NGDPT is a footnote detail/convenience/excuse for them to do argue for the Fed to do something, anything, given that politics is blocking fiscal
Speaking from the (non-economist) left, I think we are mostly muddled and ignorant on many economic issues and mostly because of two partially true, but probably largely false conceptions. For the left:
1-Economics is largely associated with technocratic management of the status quo rather than progressive transformations.
2-The language of productivity is associated with exploitation of the workforce, the ravaging of the environment for profit and the praise of work over leisure. Productivity becomes a symbol of exploitation for many people on the left – who are critical of it becoming almost an end in itself, mostly to the benefit of the few (hence the obsession with the 1%).
Briefly put the tendency of supply side economics to value the production of wealth over work conditions, leisure time and environmental protection is generalised as being “what economist do” which is sometimes not too far from the truth, but most of the time just our ignorance. This ignorance probably explains our attitude towards these ideas – but I do think economist could do better at speaking to the political preoccupations of the left. This is a great example of some that do : http://milescorak.wordpress.com/
I can’t really speak for leftie economists, but I can think of examples of leftie politicians who would be instinctively opposed to NGDP targeting.
Here in the UK, we had an expansion of public sector spending running from 1999-2010, under the aegis of Gordon Brown, first as finance minister then as prime minister. His favourite rhetorical devices including describing low public spending under previous governments as “under-investment”, and boasting (unwisely, in retrospect) to have abolished “boom and bust” by maintaining Keynesian-esque spending policies. His claim was that the budget would balance “across the business cycle”, provided one was flexible enough about when the cycle began or ended.
Many in his party regarded him as a somewhat inscrutable economic guru, who had figured out how to tame the economic forces unleashed by the deregulation of the 80s and they were content to let him pronounce about neo-endogenous growth theory or whatever he’d been reading about recently while they got on with spending the tax receipts. From the typical Labour party minister’s perspective, any initiative, program or public spending commitment could be justified as “investment” on Brownian lines – if it happened to improve public services in a cost-efficient manner that would be icing on the cake, but even if it did not then some naive bluster about fiscal multipliers could be employed. In other words, government spending was seen as a crucial support to economic growth, and this created a scenario where any government minister who wanted a good headline could just splurge a few hundred million on a new agency, commission, taskforce or, if you were the big man, a small war or two.
NGDP targeting would take a number of these toys away, because it would make it very hard for the government (executive) to claim that it has any role in promoting demand-side growth. Public spending would only be justifiable on pure cost-benefit grounds. The fiscal multiplier would be permanently retired from the rhetorical toolbox. Cuts in public spending would have to be attacked on the direct harm caused to those whose jobs/services are cut, rather than the catch all “taking billions out of the economy” line which has been UK Labour’s main attack on the coalition government’s austerity measures.
Now, I’ve been quite harsh to these leftie politicians, but the right wing has an equal (or greater) amount of stupidity within its ranks. However, on this issue they find NGDP targeting quite congenial, because it would allow them to cut public spending and place the responsibility for the macroeconomic consequences on the central bank’s shoulders (something David Cameron has hinted at with his “fiscal conservative, monetary activist” stance). They might be right about NGDP targeting being a good idea, but only because it enables them to pursue a separate goal.
I don’t know if the leftie position here is good economics. I suspect it isn’t. But in terms of political debate, the leftie position might still be good, or at least comprehenisble, politics.
Nick:
The “lefty” thing is transfering income/wealth away from the rich and using it to benefit everyone else. Paying nonrich workers more and providing less income to the rich is good, because the nonrich workers will spend on consumer goods. Taxing the rich and having the government hire workers to provide government service is great too.
Also, in the U.S., there are more and more “righties” who don’t favor inflation targeting. They didn’t get the memo about unchanging velocity and favor targeting the quantity of money, perhaps even by tying it to gold mining. Well, some of them, anyway, accept that this requires the price level to change to bring the real quantity of money to the demand to hold it.
And then, what about those who appear to believe that the “answer” is pro-market policies that will reduce the demand for money/raise velocity? The demand for money is high, but rather than accomodate this with a higher quantity of money, it is better for real output to fall until people choose to hold less money and instead purchase capital goods because better supply side policies are implemented.
Stereotypes come from the eye of the beholder… they are the product of a clash between differing organisations of meaning that fail to interpret each other. Stereotypes are constructs, the thing they refer to does not exist, but the differing organisations of meaning do exist and are real.
JKH: OK, but even if the left prefers fiscal (which is itself a puzzle), they must want monetary policy to do something. Why not NGDP?
JL: Yep, economists aren’t very good at speaking, especially to the left. (We like speaking in math and diagrams). Mostly we just speak to ourselves. The whole blogosphere thing is partly an attempt by economists to speak to non-economists. This post was partly an attempt to speak to the left. Did I succeed at all?
Nick: did it succeed?…well considering I have no formal training in economics… maybe in a few months when I have more time to broden my horizons I will be able to tell you.
My objection, such as it is, to NGDP targeting is that it might work in a pre-80s world where there was a strong expectation of wages keeping up with inflation. If, as in the UK where the central bank is a closet NGDP targeter, you’re seeing RPI and CPI heading for the stars and wages falling behind, well. You get some debt relief, but you also squash the consumer sector (or as we might also call it, the labour sector) because their disposable incomes are being eroded by the wage-price nonspiral.
As a means of getting out of recession, it’s dependent on organised labour bidding up wages. Sadly, the central banks destroyed that in order to save it way back when.
Nick,
“Why not NGDP?”
In substance, because flexible inflation targeting can accomplish the same thing (which is what the Bank of Canada does in effect), without the nuisance of an NGDP target that itself is inherently inflexible. They can use NGDP as a data point rather than objective, which is basically what Bernanke implied they’d do rather than be bound by a target. That’s not necessarily left, but being left isn’t necessarily inconsistent with that view.
For now, though, MM inflation targeters seem to have the backing of those who want the Fed to do more QE per se, with the issue of targeting methodology being set aside.
meant MM NGDP targeters
Alex! Your argument seems to me to be exactly the same as I hear from that right wing US Republican candidate (forgotten his name)! With a touch of Kalecki thrown in for good measure. Inflation is bad because it means our real incomes/real wages are lower. It’s what we economists call “the inflation fallacy”. David Andolfatto did a post attacking it a few months back. Was it Ron Paul?
Yes, it was. Here’s David: http://wallstreetpit.com/64990-ron-pauls-money-illusion
This really is a case where the sensible right-of-centre and the sensible left-of-centre need to come together against the two extremes.
Rob: I left the UK in 1977, and haven’t kept up with UK politics. But what you are describing sounds awfully like Harold Wilson in the olden days. A true endogenous growth theorist would be arguing for (some) government spending because it has supply-side effects. Good bridges and roads, that go somewhere, can increase the supply of goods, etc.
Bill: One of the nice things about inflation targeting in Canada was that, until recently, all parties (almost) stopped talking about the AD effects of fiscal policies. Instead it was “Do we need this stuff, and are we prepared to pay for it either now or later?”
I’m not going to be able to keep up with these good comments with good replies. Sorry.
Do people on the left want simply high inflation? I thinks because they they think it helps debtors and it can fund a portion of the fiscal budget.
Do people on the left want more government directed spending? Yes they do. Would they be willing to tactically use a recession to get there? Yes they would.
Jon: but the right and left can always argue about a (say) 3% NGDP target (= approx 0% inflation target) vs a (say) 6% NGDP target (= approx a 3% inflation target). I can understand a left/right argument over the particular number for NGDP growth. But that’s not what we are seeing.
Though even here, lefty Christy Romer wants 4.5% and righty Scott Sumner wants 5%?? OK, 0.5% is not a big deal, but even so.
As a lefty non-economist, NGDP targetting, while promising, is frightening. There are concerns about what both wages and interest rates do in response to the increase in NGDP growth. It is unclear if the average middle-class individual will be better off when both inflation and interest rates jump.
The changes in interest rates are particularly worrisome. Correct me if I am wrong, but a move to targetting 5% NGDP growth will put a lower floor on all commercial rates of at least 5% (plus whatever premiums appear appropriate). Will the average middle-class individual be able to lock in his or her debt at fixed rates before the change to NGDP targetting occurs? If they fail to lock in fixed rates, then there will be very little debt reduction from the jump in inflation, but instead just a higher cost to service the debt. Even if the individuals do lock in their rates, eventually they’ll have to renew their mortgages and whatnot after 3, 4 or 5 years at much higher rates.
Echoing Alex’s comments from above, it may be that the only way that the middle-class will benefit from NGDP targetting is if wages keep up with changes in NGDP. Given that a major factor in the financial crisis in the west (and in particular in the U.S.) stems from the fact that middle class wages have been stagnant for decades, one must be sceptical of the middle class’s ability to bargain for higher wages in the NGDP targetting regime.
I think you miss the point that from the right’s position, NGDP targeting would require that the government focus its efforts on industrial policy in order to be able to fund redistribution, and therefore cooperate rather than prey on business and industry. This in turn would require we correct our dysfunctional education system that creates uncompetitive workers, and it would reduce class warfare by focusing on specific policy initiatives that would make the nation competitive rather than devolutionary. The right originally abandoned industrial policy because of the collaboration between unions and the state. Now that they see unions as weak and foreign states as a threat, they would prefer to return to industrial policy and very likely, away from free trade – which was just a vehicle for competing against the government-union alliance while the USA had a temporary postwar technological advantage.
Conservatism is the sentiment and subsequent philosophy of inter-temporal group persistence by the concentration of capital in all it’s forms. In the USA conservatism also includes an allegiance to the status quo of classical liberalism, which in itself is a commercial meritocratic philosophy that retains the english system of class cooperation through multiple houses of government. The democratic socialist movement is an attempt by the proletariat and public intellectuals to obtain political and economic power by propagating the mythos of equality in order to undermine the multi-class system of government in which tehy are at a disadvantage compared to the commercial productive classes. But it is nothing more than an appeal to power for the purpose of material gain. Nothing more and nothing less.
While conservatism is more likely to rely on historical metaphor and moral argument because of their inter-temporal content, and the left is more likely to argue for empirical positivism because it specifically lacks that inter-temporal content and replaces that historical view with an absolute faith in the human ability to manage it’s own destiny, that does not mean that conservatism cannot be articulated as a rational philosophy. It simply means, that because it is more complex, it is harder to do so.
But then again, concepts of this depth are usually outside of the understanding of macro economists, and are instead the provenance of political philosophers and historians to whom economic activity is a predictable cycle driven by little more than institutions, military power, trade routes, and population composition.
Kosta: OMG! No! On average, successful NGDP targeting should give exactly the same real (inflation-adjusted) interest rates as successful inflation targeting. And the nominal interest rates would be the same on average too, if you chose the right numbers for IT and NGDPT, so you got the same average inflation rate in both cases.
Maybe that’s why lefties don’t like NGDP? They really just don’t understand what it means. But lefty economists ought to understand what it means.
Nick,
The obvious answer is lefties believe we are in a liquidity trap. The less obvious one is that the transmission mechanism of monetary stimulus is making the rich richer. You advocate fed-induced transfers of wealth from taxpayers (who take the risk of Fed risk-asset losses) and wage-earners (who see their real wages fall) to creditors/shareholders. This, in turn, is supposed to induce companies to want to invest and hire more and thereby raise aggregate income. The goal of stimulating AD is a “lefty” one; getting there is “trickle down”. A lefty might argue that with NIPA corporate profits at peak levels (to GDP) and real wages flat for a decade, perhaps reducing wages and generating more corporate (esp. financial) profit is not what the economy needs.
In the U.S we don’t even have an inflation target, it’s a “dual mandate” which the Fed can always get away with failing to meet. And if we’d actually kept up inflation at 2% from 2005 to now, we wouldn’t be in this position.
Nick : “This really is a case where the sensible right-of-centre and the sensible left-of-centre need to come together against the two extremes.”
The centre moves, so what centre are you referring to?
Also there is a difference between right and left policy prescriptions, and right and left values.
Policy prescriptions are structured by these values (axiological rationality) but also how these poles think the world works and what they think the best way to intervene is in order to get to the goals fixed by the values (cognitive rationality).
So should the centre (if it exists) be the axiological centre or the cognitive centre, or both? In my view the cognitive centre is just being closer to the truth, so there is no argument there. But the axiological centre seems a little muddled … should the goals of social policy simply be watered down versions of right and left preoccupations and if so where are we then? (Perhaps Frances Woolley’s question does need to be answered)
Curtd: “I think you miss the point that from the right’s position, NGDP targeting would require that the government focus its efforts on industrial policy in order to be able to fund redistribution, and therefore cooperate rather than prey on business and industry.”
OMG! What?! Is that your view, or your view of the right’s view? In either case, NGDPT has nothing to do with industrial policy!
OMG, OMG, (Oh Christ, Oh Christ!)
Keep the comments coming guys. Let’s get it all out in the open. I had no idea I would stir up such a hornet’s nest of strange ideas!
It makes sense if one accepts that the notion that economics can be divorced from politics is false.
The “left”, as JKH said, views NGDP as a weak substitute. If you think what is needed is boosting demand, then enough with this marginalist “incentives and expectations” bullcrap and just PAY for stuff! Build bridges, repair infrastructure, make real investments in the future productivity of the economy directly.
NGDP is an act for those who get the fact that demand matters but shy away from the inevitable political consequences of that, because at the end, the allocation of resources is a political issue – people with money have power, power is politics, thus the distribution of wealth is an inherently political issue.
Gepap: “It makes sense if one accepts that the notion that economics can be divorced from politics is false.”
My whole premise in this post is that beliefs on economics is correlated with beliefs on politics. What I don’t understand is why the normal correlation has reversed sign in this particular case.
Nick:
See..
Nominal GDP would hurt the middle class because interest rates and prices would rise.
I’m not sure where Pearson is coming from.
By the way, I don’t think “lefty” economists are all about raising employment by redistributing income.
It is when you read the comments on the blogs of leftist advocates of NGDP targeting you see what the “rank and file” thinks. And it is all about how it won’t work because it isn’t transfering income away from the rich.
I agree that “flexible” inflation targeting, which isn’t really much different than “flexible” unemployment targeting, is what the technocrat left-center economists prefer. Clever policy makers micro-manage everthing.
We keep inflation at 2%, unless “we” decide it is better to trade that off for something else.
In economics, are “righty” and “lefty” two mutually exclusive and jointly exhaustive categories, as they are for handedness (everyone is either left-handed or right-handed, no one is both)?
I’ll give you mutually exclusive, despite the difficulties of categorizing pot smoking Ron Paul supporters.
If they’re not jointly exhausive, what other categories of economists are there, and why aren’t we talking about them?
Implicit in this discussion is a category “sensible people like me whose views are too complex to be reduced to righty or lefty”.
Nick,
Take MMT as an extreme case.
They are extreme left.
They reject QE outright. Absolutely useless, they say.
And they reject NGDPT, mostly because it is closely associated with much more aggressive QE.
Woolsey,
Which part of my comment did you disagree with:
-that the risk of Fed balance sheet losses is borne by taxpayers?
-or that the intent of monetary stimulus is to reduce real wages?
Rising aggregate nominal income helps everyone if it produces real growth — I am not disputing that. The point I am making is that given a choice between boosting middle class spending (through a money-financed fiscal transfer) and boosting corporate profits by Fed share purchases, the left would prefer the former. Is this disputable?
I should have said “lowering the corporate cost of capital” by share repurchases, not boosting profit.
Would it not be simpler to say that the left prefers that the levers of economic power be held, unambiguously, by democratically-elected politicians rather than by central bankers, who are suspected of being right-wing stooges? Isn’t it just that the left doesn’t want to hear that Obama can’t save the economy but Bernanke can?
For the same reason, right-wing pro-NGDP-targeters are only happy with stimulus when it’s being done by a PhD Republican banker/economist and not by a Democrat President?
Most anti-NGDP comments from the left seem to consist of vague notions that it “won’t work” or that it will deliver the wrong kind of growth (food price inflation for me, bonuses for bankers, or something). This belief is rooted in a lack of trust in the central bank to do things that are in the interest of the general public (and hey, maybe that’s well-founded). The right holds the precisely inverse view with regard to fiscal stimulus.
Bill: “Nick: See..”
Yes, I’m beginning to. Wow!
Rob: “Would it not be simpler to say that the left prefers that the levers of economic power be held, unambiguously, by democratically-elected politicians rather than by central bankers, who are suspected of being right-wing stooges? Isn’t it just that the left doesn’t want to hear that Obama can’t save the economy but Bernanke can?”
OK. Maybe. But the central bank still has to do something. Wouldn’t the left still want Obama to tell the Fed to target NGDP?
Frances: OK. But we do still tend to see a correlation, even if it’s not 100%, because political and economic views are not one-dimensional. But why has it switched sign here?
JKH: Are you sure that MMTers are extreme lefties? In general politics, I got the impression they were slightly lefty, on average, but probably with a high variance. Warren’s a 1%er, and Bill’s a cosmopolitan jet-setter 😉
Prof. Rowe:
Lets say I am a person hopping for my eventual retirement and I want to see my retirement savings grow over time ahead of inflation. Now an independent central bank announces a policy of wanting to create a 5% inflation target and I believe that they will stick by it. I could react by deciding to stop hoarding this money and investing it, boosting demand,and hopefully earning returns that keep me ahead of this inflation, or I could react by demanding that my political representatives end central bank independence to stop this because I still prefer to save and nto take my chances investing in something new and risky with a high probability that will in fact see my savings decline relative to this higher inflation target.
As lefty, I don’t think that NGDP targeting is a viable political means of reaching the goal I want because in the end; essentially it is a attempt to bypass politics and allow “technocrats” to get there by creating disincentives to hoard money. But again, the power of these technocrats is not trully independent of the greater body politic. NGDP is then a cop-out, an attempt to “do something” while not really doing what is necessary, which is changing the balance between rent seeking (boardly defined) and actual productive activity (broadlydefined).
I’m torn between Bill’s theory (they are just too clued out to get it, as indeed are many righties), and Rob’s (each side wants their own prince to rescue the princess, and would rather the dragon ate her than that their own prince can’t get the credit, which is treason on both sides, balancing Scott Sumner’s sort of accusation of treason by the right).
Gepap: so you are a lefty, who also thinks that a higher inflation or NGDP growth rate target will reduce real interest rates, and wants higher real interest rates. So you want a larger fiscal deficit precisely because it will raise real interest rates. So you prefer fiscal deficits to fix the recession rather than monetary policy. Most lefties want lower real interest rates, because they think interest income is unearned/undeserved. But there is a sort of internal consistency to your position. (Though I think looser monetary policy would actually cause higher real interest rates, though that’s an aside.)
“They are just too clued our to get it” is not an explanation unless you demonstrate how there is a misunderstanding – it seems to me there are more issues raised here than the problem of inflation vs. the neutrality of money.
Your second explanation is a caricature. Disagreements in means go deeper than partisan strategies.
Finally both explanations are epistemologically skewed, because they implicitly rely on the superiority of your position. This is possible in a cognitive sense, but meaningless unless you make explicit your axiological position (because this is a political matter) as I have early stated and as Frances has asked.
Pearson:
Are you worried about the Fed taking on more risk to its balance sheet? Or are you worried about share prices rising enough to make investment profitable.
Or is it that you believe leftists are worried about these things?
Personally, I don’t like the Fed taking more risk on its balance sheet, but it is the Fed’s duty as long as it issues zero-interest hand to hand currency on demand.
I have no problem with share prices rising, though I would rather it be because of an increase in expected future profits due to increased future sales of products.
Rob:
I favor a regime of nominal GDP targeting. “Delivering stimulus,” isn’t really the way I think about it. The least bad macroeconomic environment for microeconomic coordination is slow, steady growth in money expenditures on output. This is consisent with keeping the quantity of money growing with the demand to hold money. If the demand to hold money rises alot, this may require that the Fed bear some, or maybe alot, of risk.
I think tax and spending policy should be based upon funding necessary public goods in the least cost way. I favor a modest budget surplus, and a low, flat tax on personal consumption. I think government spending in the U.S. is much too high.
By the way, I also oppose drug prohibition and think a U.S. invasion of Iran would be a very bad idea. I don’t think of myself as a conservative or a Republican.
Prof. Rowe:
I do not want higher real interest rates – I think Steve Waldman made a good point that the “real” interest rate right now is negative, and I think this is a good thing, so in that sense you are correct about the lefty position on interest rates. People should be spending and investing, not hoarding and saving. I was using the example of the saver for retirement not because I am one, but because I think the idea of real central bank independence is a silly one – no organization with power can be “independent” of politics.
In this sense, while I have no problem with lose monetary policy in principle (under the assumption it will lower rates) if the political assumptions underpinning NGDP are valid, I don’t think they are. I don’t think you can expect to create a believable higher inflation target created by one institution and assume that everyone will just go along with it and react to it, as opposed to taking direct actions to undermine it and destroy it because they believe such a policy harms their current interests. thus NGDP targeting is politically naive at best. And I am not a fan of politically naive policies.
Also, I want fiscal policy not for its indirect effects on real interest rates but for its real effects in the material world. I want people being employed rebuilding our infrastructure for its own sake, and believe that real investments will allow for the kind of economic growth that will provide us with the real goods and services that we need in the future.
Woolsey,
Since the taxpayers bear the risk of Fed losses, Fed risk asset purchases are de facto fiscal policy. I am saying that lefties would rather have fiscal policy that targets middle class incomes than one that targets the corporate cost of capital. I happen to agree in this instance: very much unlike the GD, the corporate WACC is now quite low and corporate profits are at peak. It is unlikely that either is a binding constraint on investment or hiring, and therefore the marginal benefit of improving the Tobin’s Q or reducing real wages is likely to be quite small.
Let me expand Rob’s point a bit. (For reference, I’m a lefty economist who supports NGDP targeting.) He said: “Would it not be simpler to say that the left prefers that the levers of economic power be held, unambiguously, by democratically-elected politicians rather than by central bankers?”
Here’s where I stand. I think Nick is correct in the post: the central bank is always doing “something”. But what I understand from right-leaning NGDPT proponents like Sumner is what I think of as “strong” NGDPT – the idea that “we should never use fiscal stimulus because the central bank is implicitly setting NGDP anyway”. Sumner argues this quite a lot, and I think it’s naive monetary neoliberalism.
I support NGDPT, but a “weak” version: “fiscal policy works, but it has no net impact if the Fed decides to target NGDP anyway.” Note – no “net” impact. What this means is that fiscal policy can and should be used to decide the composition of stimulus, because the mechanism for netting out fiscal stimulus is “implicit offset” (ie the Fed does less stimulus later).
The impact of implicitly offset fiscal stimulus takes three elements: first, the public/private composition, second, the progressivity of the stimulus, and third, the labor-intensity of the stimulus. None of these things can be controlled through the NGDPT lever, and these are exactly the things that lefty economists tend to worry about.
To see NGDPT advanced without clearly taking into account the role of fiscal stimulus puts off lefties like me. I think that this adaptation of the theory gives us a lot more room to talk about what we think economics is really about.
Nick,
The left has been very hesitant to embrace more aggressive monetary stimulus in general – not just NGDP targeting. Stiglitz went as far as saying that monetary stimulus would help evil Wall St bankers but actually hurt workers (you’d think a Nobel prize winner would be familiar with general equilibrium). Even Krugman and Delong spent the better part of 2009 telling their readers that there was little the Fed could and that more aggressive fiscal stimulus was our only hope.
I think it’s related to the way they talk about the 1933-36 recovery. Modern progressives tend to focus much more on fiscal expansion and only mention FDRs decision to leave to gold standard as an afterthought. Monetary expansion via leaving the gold standard or setting an explicit target for NGDP is just not very romantic. But putting people back to work to work by using government funds to build roads, bridges and windmills warms the coggles of their hearts. Effective monetary expansion would only boost private consumption and investment – and what fun it that? And if the fiscal stimulus had been seen as a success, it would have provided a powerful argument in favour of much greater government intervention in the economy. Had the left embraced NGDP targeting in the fall of 2008, it would weaken their (often implicit) argument that the recession is a byproduct of all that wrong with the economy and society. If all that we needed was more monetary stimulus, then there was nothing really wrong with the economy at all except the Fed’s unwillingness to do what it’s supposed to do– or, at least, any fundamental problems are relatively minor compared to the Fed’s intransigence.
As Scott Sumner pointed out, Friedman and Schwartz was, at its core, a defense of free markets. The left realized this, and was therefore very antagonistic to their thesis – very much in contrast to the pre-Depression the progressives who saw monetary policy as an extremely important tool for alleviating unemployment.
Frances: “In economics, are “righty” and “lefty” two mutually exclusive and jointly exhaustive categories, as they are for handedness”
Definitely not. Personally, I’m in favour of radically more free markets and eventual elimination of welfare programs and minimum wages, which puts me on the radical right. But then I’m also in favour of giving everyone a bank account at the central bank so we can scrap deposit insurance and bank regulations; backing money with diversified liquid capital assets so we can eliminate most of the investment management sector; scrapping most IP protections; eliminating most professional licencing protections; paying every citizen a “cititzen’s dividend” based on rents from land and other monopolies and externalities. Does that put me on the radical left? I think it just makes me a radical.
NGDPLT is small beer. If we just eliminate paper money the ZLB (and a lot of organized crime!) goes away. Then the liquidity trap goes away and the CB doesn’t have to mess with industrial policy (yes, Nick, buying listed corporate stocks is industrial policy) to regulate the economy. It’s soooo simple. What we target is a detail.
Thinking it over, it can’t be just that the left thinks monetary policy is impotent. For 30 years I have heard Canadian lefties complaining about the Bank of Canada’s single-minded focus on inflation, and how sinful and immoral it is that the Bank doesn’t pay more attention to employment. So those people can’t think that monetary policy doesn’t matter. OK, so here’s a policy that puts 50-50 weight on inflation and output fluctuations, and employment fluctuations are highly correlated with output fluctuations. So the same lefties who complained about the inflation target should be welcoming an NGDP target. The slightly left of centre Liberal Party seems interested (the same party that introduced inflation targeting originally), but that’s about it.
As a lefty:
a) Nobody has convinced me that NGDP targeting is anything but another bailout of the banks.
b) NGDP targeters seem to model banking through the money multiplier model, rather than the endogenous money model. This means their premise is false.
It seems to boil down to where one likes their radicalism. Would you righties be willing to adopt atmospheric carbon level conservatism – and I’ll be happy to settle on carbon levels circa 1850 – if you got the untested monetary regime of your choice to play with?
Ben Daniels: with one very small exception, everything you say makes perfect sense to me. You epitomise to me what a lefty NGDP targeter should be saying.
The very small exception? Why do you call yourself a “weak” version NGDP targeter? You sound to me like a perfectly standard NGDP targeter, who also thinks there are lots of other things the government should be doing with fiscal policy and wants them to get on with it. Because you think the fiscal prince has lots of other important jobs to do, you want the monetary prince to rescue the princess, rather than sit around twiddling his thumbs, because he’s useless at doing anything else.
UnlearningEcon:
a) why would targeting NGDP, as opposed to targeting inflation, or employment, have any relation to bailing out banks(Actually, Steve Randy Waldman on Interfluidity argued that targeting NGDP, as opposed to the central bank doing what it’s been doing, and twiddling its thumbs, is a good thing precisely because it might mean you didn’t have to bail out banks quite as much.
b) what has NGDP targeting, as opposed to targeting anything else, got to do with whether you believe in endogenous money? In fact, if the central bank targeted NGDP, the stock of money would necessarily be endogenous. It would be impossible to target NGDP and the stock of money at the same time.
Chalk up one more for Bill’s hypothesis.
Patrick: “Would you righties be willing to adopt atmospheric carbon level conservatism – and I’ll be happy to settle on carbon levels circa 1850 – if you got the untested monetary regime of your choice to play with?”
Well, if we targeted something like negative 99% NGDP, we should be able to get carbon levels back to 1850, in a couple of years 😉
See, I knew there was room for compromise.