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 
Here is how I think it works. Normally, right wingers are in favour of hard money, because it is part of an Darwinian type of economy in which the risks and rewards are clear, the fittest survive and there are no bailouts. Right wingers tend to be advantaged people who tend to do well in such an economic environment, and believe they deserve to do so. But right wingers tend to hold a lot of wealth in risky assets (houses, stocks etc, and also yield enhanced assets with hidden risk such as ARS and money market mutual funds), and in downturns associated with a substantial and apparently chronic fall in the value of such assets, pragmatic right wingers (as opposed to ideologues) change their tune, and begin to like bailouts. Right now, inflation offers a grand bailout, and NGDP targeting offers intellectual cover for increasing inflation, so many pragmatic right wingers support it.
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.
Expanding a bit on Kosta’s excellent post, any policy needs to be “sold” to stakeholders in order to be implemented. Since we are talking about central bank policy, the government needs to accept the policy. I am assuming here that central bank independence is false.
A full employment policy is easy to sell politically. It makes for great campaign slogans and voters can easily comprehend it and see its results. It also played a big part in the post-war employment bargain; full employment meant rising wages, lots of job openings and therefore the ability to fund the “shadow welfare state”, pensions and health insurance (just drugs in Canada, but it’s still important). Full employment was a sweet deal in terms of worker power.
The transition to inflation targeting after 1980 and the decline of full employment policies meant a loss of wage bargaining power. In due course this imperilled the shadow welfare state, pensions and health coverage. It made the middle class feel insecure. The left hates that insecurity viscerally and wants policies to increase it.
If NDP targeting is seen to pose any threat to worker power, full employment and wage levels it is Dead On Arrival on the left.
“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.”
endogeneous money theorists would argue that ngdp level targeting by central bank is useless because any tools used to target said ngdp level are useless.
“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.”
this isn’t a serious argument
Haven’t had time to read all the comments, so just…
I’m one of those leftie non-economists. (When Nick said “Let’s make it really simple” then launched into vertical and horizontal AD curves, I laughed out loud, cause that still takes me twenty or thirty seconds of thinking — not internalized and intuitive as it is with practiced practitioners.)
Just to say that I’m all for it because it allows inflation to rise when pulling us out of slumps, which transfers buying power from a smaller number of creditors (generally: holders of financial assets, especially bonds) to a much larger number of debtors (real asset holders).
Which is another way of saying: why aren’t lefties all for it?
It could be because wages have lagged prices so over the post-Reagan decades, they with some justification don’t trust monetary policy of any kind. It is managed by the creditors, after all.
And looking either postdepression or postwar, the fiscal-pumping decades were a lot better for the middle class (and even more so for the national debt, btw) than the monetary-pumping decades. So suggestions for more monetary pumping, however compelling and potentially progressive the theory, are looked at askance. (“Fool us for thirty years, shame on you…”)
So: empirics preferred over theory?
“but even if the left prefers fiscal (which is itself a puzzle)”
i’m curious about this comment. would you mind elaborating? great discussion all around
What Determinant said, plus:
I have, in various ways, tried to answer exactly this question of Nick’s over the years. Let me try again. Let’s take the princess analogy. There’s a suspicion that the monetary prince has actually been colluding with the dragon, and that it’s really sweet deal, because he is going to “rescue” the princess, and then in some amount of time, “rescue” the princess again, and again, and again…
To break this collusion, we need to let the fiscal prince take this one.
Does that make sense to you, Nick, in your terms?
If you told me that I only ever had a choice between inflation and some sort of sound-money Austrian-obsessive austerity nonsense, it would really be a no-brainer. Inflation targeting, obviously. It’s not even a Hobson’s choice.
But as Determinant mentioned, we’re at the end of an experiment in refusing to transfer money to workers and using other means to keep the consumption going. And you want to keep that experiment running, knowing now where it leads? On a past thread Stephen argued that the allocation is what’s important, not the means of allocation. We can see all around us how wrong that is. The means of allocation create certain paths to power in society, and have the ability to affect future bargaining power. So they matter deeply. Inflation targeting doesn’t deal with the social roots of the ongoing crisis; it leaves institutions in place that constantly lose legitimacy the more frequent they must extinguish fires that everyone suspects their controllers are actually setting.
THAT is why NGDP targeting is not a lefty thing. Been had too often. If we must, we must, but only under duress.
Hey Nick,
I’m a crazy non-economist lefty (I’m a vegan with a dual honours degree in English Literature and Philosophy who sold his car and bought a bike). I generally think countries should be judged according to how their poor and vulnerable are treated, and have been known to say that I would rather sacrifice productivity growth and make everyone poorer to have a more equal society, and think that higher taxes encouraging people to work fewer hours is a good thing (though, of course, done right you don’t need to decide between a just society and productivity growth, as long as you’re willing to move to consumption taxes: just look at Scandinavia).
I got on the NGDP Targeting bandwagon about a year ago, and have convinced a lot of my lefty friends that it’s the best thing ever. I also agree with the Market Monetarist credo that demand shocks are best dealt with through monetary policy than fiscal policy.
We exist!
Lefties haven’t come out against it, have they? They just haven’t piled on for it. Those on the right? I would expect some or many of them to object mightily.
I’d throw my answer mostly in with Ben Daniels, and put part of the blame on Sumners, who consistently poses the question as a pure either or. Automatic stabilizers like unemployment insurance, food stamps, and Medicaid are things the left generally considers important. Lefties also tend to believe in the ‘marginal propensity to spend.’
I’d also add some RATEX skepticism, I think you’d note that in some of Waldman’s critiques of NGDP targeting, as well as DeLong’s. Most lefties would probably prefer both monetary easing and fiscal stimulus, where expectation coordination takes a back seat to buyin’ stuff.
Nick, this uncertified lefty favours NGDP targeting, but when my magneto needs it, I want my fiscal stimulus too. But don’t expect me to stop bellyaching about lots of other lefty obsessions, like the Lorenz curve!
Looks like Mandos and I are going to tag-team again. 🙂
What Mandos said, most especially this:
On a past thread Stephen argued that the allocation is what’s important, not the means of allocation. We can see all around us how wrong that is. The means of allocation create certain paths to power in society, and have the ability to affect future bargaining power. So they matter deeply.
I am sick of being looked at by my parents generation (boomers) as some sort of freak because I am on the job search gong show and don’t currently have a job. They really don’t comprehend the enormous opportunity they were offered in the 1970’s to lock in a career under the prevailing deal. They think it was all merit and that’s how the system works.. It wasn’t all merit and the system doesn’t work that that anymore.
When I talk about the insecurity of contract work they don’t even know what I am talking about. When I say that employers don’t offer DB pensions any more it goes over their heads. I have been exposed to the nasty side of business that they won’t acknowledge exists.
When I support more government programs, particularly pharmacare I want to take the shadow welfare state out of the shadows. Employers have demonstrated that they don’t want to carry the welfare state burden. Fine, let the state carry that burden and let employers give people straight pay. Let the government take care of pharmacare and lets make pensions the fifth pillar of the financial system. Let’s acknowledge and manage the insecurity and failure potential of private business. Because someone’s drug coverage should not depend on their employer’s financial prospects.
Speaking of insecurity, if demand shocks are best dealt with through monetary policy and central bankers are convinced that monetary policy = interest rates then Market Monetarists have a problem. The answer to demand shocks is not debt because interest rates mean debt. Distributing wealth through cheap mortgages and access to the appreciation of housing values is not actual wealth. It is a bubble. Increasing home values does not increase the basket of consumable goods, especially if those increased values are for existing homes. Methods of distributing wealth matter.
Increasing debt increases the risk of default on debt. The solution to a debt crisis is not more debt.
Distribution of money in the form of net payments from the central bank/government entity is a fiscal exercise and therefore a political one. The fact that the political process is anathema to Market Monetarists is another one of their problems.
Finally, the lefty rebuttal to Milton Friedman and to Market Monetarists is that “Since inflation is everywhere and always a monetary phenomenon and money is everywhere and always a political phenomenon, it follows that inflation is everywhere and always a political phenomenon.”
[I just found this in the spam filter. Sorry Kosta. NR.]
Mandos and Determinant, keep up the good fight. I am going to ask a more technical questions.
Nick Rowe wrote in response to my comments on interest rates 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.
I agree with what you’re saying about real interest rates, but I’m not so sure about nominal rates. For instance, one model of what determines long term Treasury yields in a country is the expected nominal growth rate of that country’s economy. If a country’s nominal growth rate is higher than its long term Treasury yields, then investors will pull money out of the T-notes and invest into the economy until the T-note yields rise. Conversely, if the nominal growth rate drops, then investors will pile into T-notes, first because of the extra yield, and then because of the extra safety, until the T-note yields drop.
Now if the central bank pegs NGDP growth to 5%, won’t Treasury note yields also be pegged to just over 5%: the expected nominal growth rate plus risk, currency, default, liquidity and other premiums? Why would anyone buy Treasury notes unless they were given a return of at least 5%, given that a) other investment opportunities must exist in the economy which will return at least 5% nominally, and b) that if you one buys the Treasury note, there’s a chance that inflation will rise to 5% (meaning that a yield of less than 5% could result in a negative real return).
Now given that Treasury notes are trading for just over 5%, won’t all longer-term interest rates in the country which are based on the Treasury note yields have a floor of at least 5%? Going back to my original point, will not all longer-term rates, and in particular mortgage rates, jump in response to a shift to NGDP targetting?
Lastly, a jump in interest rates is only fatal if wages do not respond in kind. But following up on previous comments, will NGDP targetting increase the power of labour, or will the gains be captured by a well-positioned minority?
(Upon rereading Nick’s response, I realize our positions are quite close. What I am pointing out is that it is likely that after a jump to NGDP targetting, commercial rates will rise, either in expectation of increased growth, or in expectation of increased inflation. In either case, this will hurt the middle class, unless the middle class also sees an increase in wages commensurate with the increase in interest rates. It is unclear that the middle class will see this increase in wages, and it is likely that the net effect will be that the interest rate burden on the middle class will increase, without corresponding increase in pay.)
Determinant and Mandos, keep up the good fight. But let me dwell on a more technical point.
Nick replied to my comment on interest rates: 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.
Nick, I agree that real interest rates won’t change under NGDP targetting, but I am sure that there will be changes in longer term nominal rates. As I understand it, one of the models for longer term rates is that the yield of Treasury notes approximates the expected nominal growth rate of the economy. This model argues that if Treasury yields are lower than the expected nominal growth rate, then investors will move money from Treasuries into the real economy and get a higher return (which will drive up yields). Conversely, if the economy’s nominal growth rate drops, investors will move in Treasuries until the yields drop as well. So, if the central bank targets a NGDP growth rate of 5%, one would expect that Treasury note yields would rise to at least 5% (plus potential premiums for currency, liquidity, default and other risks).
Successful NGDP targetting at 5% will on average lead to the same nominal interest rates as an economy growing at a nominal rate of 5% with inflation targetting. In both cases, T-note yields will be about 5% (and bank rates will be above 5% with significant risk premia for some mortgages and all unsecured loans). Of course, these rates are quite a bit higher than the rates being offered today (like 3% higher).
What will happen when the NGDP target is first announced and implemented? Presumably T-note yields will rise quite quickly to just above the NGDP target, and commercial rates will move correspondingly. If the central bank announces a 5% NGDP target, why would any investor buy T-notes without being guaranteed at least 5% return? Rates will rise, arguably to their correct point (i.e., the real growth rate + inflation), but they will rise.
How will this jump in interest rates affect the middle class? NGDP is lauded as a method by which debt can be inflated, but that is only true for debt with fixed interest rate terms. Much of the middle class will be caught with variable rates, or be forced to renew loans at new higher fixed rates (say an additional 3%). For these people, their interest burden will rise under NGDP targetting, and will rise quickly. This is only tolerable if these same people also see a proportionate increase in their wages. Will that happen?
Or will wages fail to keep up with change in NGDP growth? Will the increase in interest rates in response to the increase in the nominal growth rate merely impoverish the middle class through yet another mechanism?
Lastly, does anyone have an idea about what will happen to short-term rates and the yield curve if NGDP targetting is announced? I presume that while the economy is being reflated, the overnight rate will be pinned to the zero-lower-bound. But on the other hand, the long end of the yield curve should rise to at least the NGDP target. Does this mean that a very steep yield curve will have to arise? Won’t this also mean that banks will make a fortune by borrowing at 0% and then lending at the long end of the yield curve? Or will all the excess liquidity force down the long end of the curve (but won’t that pull money out of Treasury notes and bonds)?
Targetting NGDP is promising, but I am concerned that only certain individuals and institutions who are well positioned will benefit from the new policy. For the rest of society, and in particular the middle class, the change might catch them flat footed, and leave them worse off.
Rob
“The fiscal multiplier would be permanently retired from the rhetorical toolbox.”
Why exactly? I don’t see what that has to do with NGDP targeting.
And as for the split between fiscal and monetary policy – on the basis of the experience of the last 20 years, I think we are better off with somewhat looser fiscal policy and tighter monetary policy than the other way around (because otherwise you automatically are increasing average leverage).
And Nick, I consider myself left of center (whether I’m an economist or not is another question – I have a B.Econ (hons) and worked as an economist for a while – but that was a long time ago) and I have nothing against NGDP targeting – although I guess that the target itself may need to be changed sometimes.
And Nick, let me point you to another comment of mine that may give you another possible hint:
http://worthwhile.typepad.com/worthwhile_canadian_initi/2011/10/all-chuck-norris-really-needs-is-stamina.html#tp
Comment Oct 27,2011 at 9:30
P.S. In my post from 5:30 AM I left out two very important words
…. otherwise you automatically are increase average PRIVATE SECTOR leverage.
Nick, the problem is not that I am afflicted by some “fallacy” or that I am Ron Paul (you realise you are likening me to a man who prints hatesheets urging readers to arm themselves to shoot at their black neighbours because “the animals are coming”?) but that, observably, empirically, wages are not keeping up with inflation in the UK, which is pursuing a monetary policy operationally similar to an NGDP target. And consumption and private investment are in the toilet and so are both real and nominal GDP!
The whole basis of modern central banking and stabilisation policy is bound up with the notion of the wage-price spiral. Hence the constant lectures about wage restraint, the notion of opportunistic disinflation, taking away the punchbowl. If we permit inflation, wages will go up, and they will go up by inflation plus x, and off we spiral. Similarly, for long run monetary neutrality to hold, workers must either be able to bid up wages, or else what? What’s the limiting factor? Why would it hold? Well, prices would rise until they hit a level where demand would be choked off, and they would be reduced by recession – successive Gilded Ages and Depressions.
(Actually, in the 19th century, without unions or employment laws or macrostabilisation, that’s precisely what did happen!)
NGDP-targeting is just this doctrine, mugged by depression. If we’re experiencing deflation, the answer is to let the spiral run up a few notches. But what if the spiral doesn’t run up – because we systematically set out to create the expectation that it will never be allowed to and that any attempt by workers to increase their share of national income will be crushed with whatever degree of unemployment it takes? The targeters of the 80s were very clear that their aim was to kill the wage-price spiral.
They destroyed the economy in order to save it.
On the subject of why lefties to date have not opposed the creation of money by private banks, there was an article in a UK left of centre paper, the Guardian, yesterday opposing the above money creation. See:
http://www.guardian.co.uk/commentisfree/2011/nov/15/money-privatised-stealth?INTCMP=SRCH
That’s a first, far as I know.
The UK inflation report is out aaand the pony isn’t in there.
A couple of thoughts:
1. It’s good to see some comments from lefties basically supporting NGDP targeting. It partially restores my faith that the world (and people’s views of the world are part of the world) makes some sort of sense.
2. For those lefties who do not support NGDP targeting: what is your preferred target for monetary policy? What do you want monetary policy to do? Do you want an inflation target? A full employment target? A fixed exchange rate? Or what? If you were Governor of the Bank of Canada (or wherever), what would your target be?
Because when you say that an NGDP target would be bad because it would do X,Y,Z, that really makes no sense at all logically, unless you have some alternative monetary policy implicitly in mind. If someone says that a 5% NGDP target for monetary policy would be worse than a 2% inflation target for monetary policy, because the former would make XYZ worse than the latter, I can understand what they are saying. But unless you tell me the alternative, you aren’t really saying anything at all.
3. Judging from the number of comments (and probably more will come in now that Mark Thoma has linked), I seem to have hit a nerve. I think the nerve is this. Many (not all) of those on the left simply do not have any clearly-articulated view on what they want monetary policy to target. They don’t like monetary policy, because they associate monetary policy with the righties, so they don’t want to think about it. They just want to criticise it. But that doesn’t work. There’s a central bank there. Unless you want to abolish it, like some Austrians, who have to say what it should target. You simply can’t not have a monetary policy. You can’t duck that question.
… Inflation is bad because it means our real incomes/real wages are lower. It’s what we economists call “the inflation fallacy”.
I believe Alex has addressed this already, Nick. In an inflationary environment some people’s real wages will fall, particularly in the context of massive unemployment where few people have the kind of bargaining power they need to demand raises that keep up with higher prices. Those who will be affected the most are the least vulnerable.
Furthermore, several of the defenders of NGDP level targeting have already explicitly asserted that their purpose in pushing a move to NGDP level targeting is to create a situation in which real wages are allowed to fall further. They can’t turn around now and claim that those who say this is going to happen are committing some kind of economic fallacy. Reducing unemployment by encouraging wages to fall is a right-wing, free market approach to economic recovery. It’s not surprising the left opposes this approach, especially given the degree to which wages at the bottom have been either stagnant or falling in recent years.
Once some of the NGDP targeting supporters, like Matt Yglesias and Scott Sumner, saw the politics of the policy was against them on the score of inflation , they suddenly discovered that inflation was a confusing or somewhat meaningless concept. How convenient.
Personally, though, my resistance to the NGDP targeting proposals and proponents is based on my opposition to monetarism as an economic theory. I believe monetarism is, on the whole, a failed paradigm for understanding the economy, and so my opposition to wasting time on one more monetarist fix for economic woes is that I think it is no more likely to have an impact than any of the other monetarist targeting formulas that have been tried, and failed. Monetarism is an approach that is attractive to some right-leaning minds, because it suggests a monocausal determinant of economic conditions and very, very limited scope for effective government involvement in the economy. A lot of people on the left are serious fiscalists, of Keynesian or other varieties, and think the obsession with central bank policy targets is a distraction from the real heavy lifting that needs to be done in the real economy.
My big problem comes right at the beginning of your post. You say:
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.
I simply don’t believe that the central bank can “choose” the slope of the demand curve, one way or another. At least not at the zero bound. Once rates have gone as low as they can go, there is no magical channel of central bank “easing” which pushes money out into the real economy where it will boost AD.
Dan: 1. some economists (I’m not one of them) believe that nominal wages are sticky and nominal prices are perfectly flexible. (This model can be traced back to Keynes’ General Theory). In a model like this, if AD falls then employment falls and real wages rise. And when fiscal and/or monetary policy increases AD to escape the recession, employment rises and real wages fall. If you believe that model, then a fall in real wages is a necessary side-effect of escaping the recession. That’s true whether you target NGDP, inflation, full employment, whatever.
I don’t believe that model, because empirically it doesn’t really work. Real wages are not counterclcylical as that model predicts. They are (very roughly) acyclical.
The question of the relative stickiness of wages and prices, and whether real wages are pro or counterclyclical, is orthogonal to the question of the appropriate target for monetary policy.
2. The question of whether in fact a central bank can escape a liquidity trap and hit its target, whether that be inflation, NGDP, or whatever, is also a separate question.
Nick
This is the best post and best round of comments Ive ever seen here, almost anywhere really. I mean that sincerely
Thanks
Gizzard: Wow! Most unexpected. Thanks!
Dan: BTW. Canada is not at the ZLB. Most countries are not at the ZLB. Even the US won’t be at the ZLB forever (at least, I hope to God it won’t!). For the sake of argument, if/when the Fed is above the ZLB, what do you want it to target? If not NGDP, then what?
Now that Ive gotten my gratuitous butt kissing out of the way I can return to what I usually do in Nicks comment section and snarkily act like Nick is part of the problem. The problem of academics and other elites who defend a mostly indefensible paradigm and system.
I once thought that Nick did this partially (maybe mostly) out of a true insensitivity to what the other side was really wanting and partially to his (just like everyone elses) ignorance but after reading this post and his comments I think it is almost entirely the latter, which is completely excusable. Being ignorant is excusable, we all are, but being insensitive is not. We should all try to at least understand others and be sensitive to their wants and needs, because likely they are just the same as ours if we really look at it.
I will comment much more on specific comments but I wanted to say this first to Nick. This is the type of questions we should be asking.
One (pertinent to the real discussion here) comment…. I think its also reasonable to ask “Why doesnt everyone feel that “full employment” should be a goal? I suspect that it has something to do with govt picking winners and losers and that private sector should determine level of employment solely, but if we are of the mind that some things should be left to naturally occur, so to speak, without state intervention, why is it okay to target GDP? Which is a complete state statistic in the first place.
Nick, I don’t have time to read all the comments, so I apologize if this has been covered. I’d divide the left up into two groups:
1. Those who don’t understand monetary policy, and don’t focus on the issue (the majority).
2. People like Krugman and DeLong, who presumably used to favor some sort of Taylor Rule, which might be seeing as doing roughly the same thing as NGDP targeting, but looks superficially more “scientific.”
No, Nick, you’re mischaracterizing the source of the nonchalance on this issue.
Let me put it this way: it’s a question of the order of operations. Yes, you should inflate as and when necessary, but only once some very elementary (radical-seeming, but not really) institutional/fiscal/political/distributional adjustments have been made, and the new cash flows to the places that it should. I don’t want to abolish the central bank. I simply want to be something completely different from what it is.
This is a moderate, reformish left prescription.
It’s the same with free trade. I don’t oppose free trade agreements because I don’t think people should have mangoes from Mexico. I oppose it because our economic structures and institutions have never been adjusted to ensure that its benefits are distributed justly. There’s a clear incentive for some people to want the free trade before the reform—because it reduces the bargaining power of labour, the pressure from environmentalists, etc etc. I would guess that the same people wouldn’t find free trade so great once the reforms took place.
Same for inflation targeting. Using it before reform rewards the wrong people and brings us back to the same place. Using it after reform may do what it is advertised to do.
You’re just not on the right page of the world-fixing textbook. We’re still a chapter or two behind.
One more comment on my previous comment. To me targeting a nominal variable instead of a human condition (unemployment) is ………………….. insensitive. A nominal variable (nGDP) has no compunction to address a human condition (unemployment) it might and it might not. NGDP could triple while unemployment stays the same. Why not target the human thing and simply deal with the monetary thing as it arises. Its only fu–ing money. We invented the stuff certainly we can handle it.
I would just say to Mr Sumner that YOUR problem is that you dont understand accounting and modern banking.
If you dont understand accounting then technically you dont understand modern money because EVERYTHING of value in current system is/and must be (unless fraud is going on) accounted for. That is how we know who has what and how much. Think of it as scorekeeping. Modern money without proper accounting is like playing the Super Bowl without a third party scorekeeper.
Your misunderstanding of banking leads you to think that savers are funding borrowers loans, Let me present with a thought experiment that shows how this cannot be correct.
Imagine ten people who are all consuming every bit of their income. They have nothing to save because they spend everything to live. Now imagine that only one guy finds a way to consume less and can therefore accumulate savings. At this point could a bank (Im going to take a cue from neo classical econ and “assume” a bank into existence) take his savings and lend them to any of the other nine people?? Of course not. Everyone else is consuming all their income, they have nothing to borrow. A bank could however loan the saver some money against his future disposable income. That loan is created out of thin air and is an addition to present money supply. Once each of the other nine people in that are able to accumulate savings by not using all present income for consumption, they can then become a borrower against THEIR OWN potential income stream.
It requires no one elses savings for me to get a loan, only my own potential future income beyond consumption.
Banks make claims on each borrowers own savings and future income and no one elses.
Gizzard: I’m oversimplifying a lot, but:
At one extreme you have the central bank (say) target the price of gold. It’s really easy to do, and the central bank can hit that target exactly. But it leads to really bad fluctuations in the things that matter to people.
At the other extreme you have the central bank target (something like) “sustainable full employment” (somehow defined), which is what really matters to people. But we can’t do it. It’s impossibly hard to hit that target. We can’t see that target, and we can’t shoot straight enough to hit it even if we could see it. And if we consistently miss, even by a fraction, the result is eventually either hyperinflation or hyperdeflation depending on which side we miss. We tried doing that in the 60’s and 70’s, and gave up, because it failed. That was the Phelps/Friedman/70’s memo.
NGDP target is a compromise. We can hit it fairly closely most of the time, and if we miss, even if we miss by a bit consistently, the consequences aren’t too bad.
Mandos: OK. 1. Suppose you got the reforms that you want. What would you have monetary policy target?
2. We don’t always get what we want. We still have to decide what to do. If you failed to persuade people to accept your reforms, what would you want the central bank to target?
What do I want monetary policy to do? I want it to ensure that there is always enough money in the system to make sure that full employment is achieved, given the reforms in the system (strengthening unions, etc) that ensure that the money flows the right way.
If you’re going to present a scenario to me/us in which I/we have already lost, then I already gave you my answer far above. Since I don’t believe that it’s responsible to deliberately encourage “creative destruction” and don’t trust that massive depressions won’t create fascist backlashes, and if it’s the case that inflation targeting is the only way to defer calamity another day, then, by gum, let us have inflation targeting.
Gizzard: simplify. 10 people all consuming all their income, and saving nothing. Then one guy appears with a printing press. He prints off some money and lends it to one of the 10. Now we have a monetary hot potato, because the guy that borrowed the money (presumably) wants to spend it, not leave it sitting in his pocket. Standard monetary disequilibrium analysis.
See e.g. my http://worthwhile.typepad.com/worthwhile_canadian_initi/2011/10/wicksell-and-the-hot-potato.html
Scott: but your first group needs some unpacking. Why don’t lefties want to think about monetary policy? And I’m beginning to think that’s the big issue. Why is monetary policy associated with righties?
The righties are always explicit about what they want monetary policy to do, even if it’s sometimes daft. Even if it’s “abolish central banking and privatise the lot”.
I’m trying to get a coherent monetary policy out of the left, and wondering why NGDP wouldn’t be it.
Nick –
Your monetary hot potato thought experiment is a fiscal transfer, i.e. central banks as currently mandated cannot do what you describe.
Mandos: OK, you have answered my question. If you get the reforms you want a vertical AD curve. If you don’t get the reforms you want a horizontal AD curve. But that’s puzzling.
1. What about the Phelps/Friedman/70’s memo? A vertical AD curve and vertical LRAS/LRPC is gonna create problems, even if all your reforms work exactly as you want.
2. Why not the downward-sloping compromise?
RG: it’s a loan, not a transfer. The printer lends him the money; he doesn’t give him the money for free. And sure, central banks don’t normally lend to the public. They normally lend to governments and commercial banks. So what? I conceptually cut out the middleman to keep it simple.
Nick,
I’m sorry, I should have put NGDP targeting rather than inflation targeting in my message above and have probably confused you. I’m just so used to writing the latter that it just comes out whenever I want to use the word “inflation”. Also, I wrote it during my afternoon non-nap 🙂
Let me put it this way: if you can rid these processes of banker moral hazard, ensure that monetary policy is not used as a wedge for capital against labour as it is currently being used in both its inflationary and deflationary forms, etc, etc, then we can talk about the full gamut of monetary policies and what they mean in that particular context. I suspect that many of the empirical observations would be different when we have changed the basis under which these discussions are being held. For most of the left, the 70s situation is blamed on resource shocks, and the context in leftist discussion is that stagflation in the 70s was used as a political wedge against full employment rather than it being a real thing.
I mean, my own personal vision is far more utopian and ambitious, and involves the eventual abolition of anything that we would recognize as money. But that’s neither here nor there.
So, in short, if you’re asking for an answer as to what The Left wants out of this current situation in terms of monetary policy, the answer is: too soon to say. Fix the political relations first, then come back and ask that question.
Let me describe how this line of questioning feels, by analogy. It’s like working in a bakery, where one employee keep stealing the cakes, and the business is slowly going under. The other employee knows about it, and is trying to tell the manager. But the manager insists, instead, on asking Employee B about the amount of cocoa in the frosting of their most popular cake and its impact on sales. Too much? Too little? That’s not an unimportant question—far from it—but it seems a little premature. In fact, it’s so premature that we sort of have to wonder whether the manager has some kind of understanding with employee A, but maybe she’s just so feckless that she doesn’t notice.
So when you accuse the left of being unserious about monetary policy, my reaction is, um, so? Sure, we have to have a monetary policy, insofar as we have money that implies the existence of a monetary policy. But if we’re forced to answer this question now, then we divert energy we could be using to forestall the next crisis—in fact, we could even be enabling the next crisis, as the bakery slowly goes under.
Mandos: OK. The bakery analogy works.
I’m a lefty non-economist who reads econoblogs religiously and supports NGDP level targeting. I agree with DeLong, Thoma, Krugman and others that BOTH monetary and fiscal policy working in tandem is the best way forward. In the U.S. fiscal policy is being blocks by conservatives who apparently want to wreck the economy in order to make sure Obama is not re-elected. (They also sent an intimidating letter to Bernanke.) Conservative and Republican politicians often support Keynesian fiscal stimulus in other circumstances: military Keynesianism in opposition to super-committee defense cuts, the Bush tax cuts, and Reaganomics.
I share lefty goals with Alex and Dan Kervick but disagree with their opposition to NGDP targeting. I don’t think their objections make any sense. They ignore historical precedents and employ ad hominem attacks on NGDP supporters, never good signs.
Charlie Evans of the Chicago Fed suggests targeting 3 percent inflation and 7 percent unemployment and I would support that as well. At his recent news conference, Berananke was asked by a New York Times journalist (a more liberal paper which published former Obama CEA chairwoman Romer’s piece arguing for NGDP targeting) if the Fed had been considering NGDP level targeting. Bernanke said no because what they’re using is working in his opion (even though Fed forecasts are “unsatisfactory”(?). Of course what the journalist’s question was implying was that people don’t believe it’s working. Charlie Evans doesn’t believe it’s working.
Dan Kervick:
“A lot of people on the left are serious fiscalists, of Keynesian or other varieties, and think the obsession with central bank policy targets is a distraction from the real heavy lifting that needs to be done in the real economy.”
“A lot?” Who? Which blogs? “Obsession?” This is the problem with a certain segment of the left. I don’t know their numbers I think Stiglitz shares this view. Doug Henwood says “devaluation is the lazy way” to get back to full employment.
The European Central Bank shares their view that two percent inflation target is sacrosanct. Doesn’t matter if the world burns! We’ll do the “heavy lifting” with what remains afterwards if anything remains.
Hey Nick
“At the other extreme you have the central bank target (something like) “sustainable full employment” (somehow defined), which is what really matters to people. But we can’t do it. It’s impossibly hard to hit that target. We can’t see that target, and we can’t shoot straight enough to hit it even if we could see it. And if we consistently miss, even by a fraction, the result is eventually either hyperinflation or hyperdeflation depending on which side we miss. We tried doing that in the 60’s and 70’s, and gave up, because it failed. That was the Phelps/Friedman/70’s memo.”
I think its a little extreme to say we “cant” do it. Of course we can Offer a 10$/hr job to anyone who wants it and run it through as local a bureacracy as it needs to be to meet real needs. Im sure every community in America would have a long laundry list of things theyd like to see done that arent being done by the private sector. Additionally, arent you being just a little too certain that the Phelps/Friedman memo was “correct”. There are an awful lot of questionable assumptions made in Friedmans paradigm.
I get that NGDP is a compromise but it feels like a GDP standard instead of a gold standard ( I know righties love standards!). Isnt this much like someone having a claim to a non varying portion of GDP? As GDP grows your percentage of it would stay the same for the most part it would appear ( at least this is what is hoped for, other wise it would be (gasp!!) redistributionist)
I dont think your simplification of my thought experiment adds anything. Im trying to disavow people of the notion that bank lending is anything like me borrowing five bucks form my buddy for lunch. When I borrow 1000 from you directly, yes nothing has changed at the macro level, but when I borrow 1000 from the bank, there is a an immediate macro change. I get 1000$ (new addition to money supply/ aggregate buying power) and I just pay it back incrementally with money I was currently not using for consumption. My own income generates the loan. Even if Nick had 10,000 in savings at that bank, his 10,000 doesnt make my 1000 loan possible. My own potential income stream, properly reported and confirmed, IS the only impetus for that loan.
I think this is important just likeI think its important to know that matter is made of atoms, at least if you want to study matter and its properties. Unless you think banking has ZERO influence on our economy, you should want to get banking right and the biggest part of getting banking right is knowing that my savings are not the source for Nicks loans. Never has been never will be. Nick stands alone as the only thing that needs to be evaluated for Nicks credit worthiness. The bank could well say ” Well Greg if you want to lend to Nick, have at it but we arent”
Gizzard: “Of course we can Offer a 10$/hr job to anyone who wants it….”
With those jobs financed by new money. Where the $10 per hour rises at some fixed (say) 3% percentage per year. That’s (roughly) the (an?) MMT proposal. One of these days I’m going to do a blog post on it. Theoretically it’s interesting. But it actually means a horizontal AD curve. Exactly like inflation targeting, except the wage replaces the CPI. Exactly like the gold standard, except labour replaces gold. It’s like the unemployed going off to pan gold. Except they pan for paper money instead.
“I dont think your simplification of my thought experiment adds anything.”
It adds nothing. It’s just a simplification. The point is that it subtracts nothing that’s important.
“Im trying to disavow people of the notion that bank lending is anything like me borrowing five bucks form my buddy for lunch.”
Understood, and agreed. The difference is that bank lending (can) create new money. And that new money creates a disequilibrium between desired saving and desired investment. And that disequilibrium (which us disequilibrium monetarists think of as the monetary hot potato) causes macroeconomic effects. I need a central bank to talk about that process. Adding regular banks into the story complicates it, and magnifies it, but doesn’t affect the essentials of the plot.
Peter K. Good! More lefty NGDPers coming out! Restoring my faith that the world makes some sort of sense.
Again haven’t had time to read all the comments.
“Inflation is bad because it means our real incomes/real wages are lower. It’s what we economists call “the inflation fallacy”.”
Yes, or the money illusion.
But looked at over 30 years, inflation — low and steady as it may have been — has been bad for the middle class for exactly that reason: prices rose faster than wages.
Most people think “inflation” means price increases, not wage increases. Since that has been the case for them over three decades, it’s not really an “illusion…” In the long run, many of them died.
Mandos : “You’re just not on the right page of the world-fixing textbook. We’re still a chapter or two behind.”
Exactly, best definition of the modern left, they are not happy with the “where we want to be going” part of the world’s orientation, so not understanding why they won’t follow on the “how to get to where we are going” part is no understanding the left. It’s the basic difference between reflexive and instrumental knowledge, they are two steps of the puzzle that need to be understood as different before anyone can hope to understand the other.
Nick: that is why your attitude of “well if you don’t have an alternative what you are saying is meaningless” is wrong. You are addressing a reflexive argument with instrumental criteria. They are addressing an alternative, just not on the same level action, because they are fighting to change the meaning of goals.
Nick: “Mandos: OK. The bakery analogy works.”
Yeah Everyone is happy!
“1. Those who don’t understand monetary policy, and don’t focus on the issue (the majority).”
this basically reads as ‘those who don’t believe monetary system works exactly as i, scott sumner, says it does.’