I just read Matt Yglesias "Monetary policy complacency is the conventional wisdom" (HT RA of The Economist) piece in Slate. It's depressing reading.
"On one team are the leaders of the Federal Reserve, the European Central Bank, the Bank of Japan, and the Bank of England. Alongside them are the political leaders of the United States, Germany, Japan, and England along with the main opposition parties in all of those countries. The Bank of International Settlements wants tighter money. Every few months Brazilian politicians pop up to complain about "currency wars." And then on the other side you have … a handful of economics bloggers."
Who else can we get on our side? What sort of coalition could be built to support politically a commitment by central banks to a higher level-path of NGDP?
1. The currently unemployed? And maybe those about to enter the job market who fear the risk of unemployment? And maybe those who are currently employed but in jobs which may not last?
OK. But what percentage of the population is that? What is the likelihood they would set aside their individual initiatives to solve their individual problems and all get together to lobby for NGDP targeting? Some sort of latter-day Jarrow March, with pictures of Scott Sumner unfurled on great banners?
For some reason, it doesn't seem very likely.
2. What about the capitalists?
Low (not just low but negative) real interest rates, and low rates of return on all assets, make things very difficult for pension plans, and for savers in general. You need to contribute more now to get the same future benefits, or get lower future benefits for the same current contribution. Whether defined benefit or defined contribution, or just your own personal saving outside of any formal plan, somebody's got to take the hit, either now or later, from low rates of return on assets.
The IS curve slopes up. Low risk-adjusted real rates of return are a consequence of the tight monetary policy that is low expected future NGDP. Stock markets jump on even the hint of a commitment to looser monetary policy.
The powerful monied interests need to demand a higher rate of interest, which only a looser monetary policy can achieve.
Worthwhile Canadian Initiative 
Nick: “God, but thinking about this is interesting (to me)!”
And for me too. Anyways I think that this is important and that there is somehting behind this. David Glasner had few posts about diverging expectations and what causes this may have on economy. All this is tied to some important topics that are being recycled over and over again:
1) What if our recession is structural, or real or whatever?
2) How so that even after so many years we are not out of recession when we are back on the pre-recession trend (I am aware of fantastic discussion that was stirred around this, but I still have a feeling that it was left kind of unfinished).
The 2) has also something to do with “microfoundations” – if sticky prices/wages is the cause of recession in New Keynesian story, then it follows that any successful attack these ideas means successful attack ob the whole story. So is there something else? Why do we have diverging expectations now and we did not have them during great moderation?
Nick,
It’s this an implicit admission that academic economists (outside of policy makers, regulators, and central bankers) have little influence? Because it sounds a lot like it.
If you want to some help from polisci cousins then I would suggest the following by William H. Riker, The Theory of Political Coalitions, and The Art of Political Manipulation.
*’Is this’ not ‘It’s this’.
I thought Krugmans idea for a “Manifesto For Economic Sense” was a good start. a lot of people did not sign it because it was Krugman and it did not emphasize monetary over fiscal policy. Generally my experience with friends and colleagues is basically a lack of understanding that the Fed has consistently missed its forecasts, that there are those on the Fed committee that think we are near full employment. When i educate them, they say “were doomed.”
To be fair, the whole economics profession is deeply confused as well. about a third are caught up in this silly revival of early 30s Hayek liquidation and deflation is good. Another third think the problem is structural, and the last third is split between advocating more fiscal stimulus (not gonna happen) and ngdp targeting. Many are still tilting at the inflation windmill.
It might take a whole generational turnover to fix this mess, it took 14 years for the Fed to recognize its errors in the 70s.
DavidN “It’s this an implicit admission that academic economists (outside of policy makers, regulators, and central bankers) have little influence? Because it sounds a lot like it.”
Yep. But the academic economists are sometimes perhaps complacent/defeatist too.
dwb: “I thought Krugmans idea for a “Manifesto For Economic Sense” was a good start.”
Yes, but he made the classic mistake of petition writers. He made it too long. A one-liner: “Loosen monetary and/or fiscal now, with a price level or NGDP path target!” would have got a lot more signatures, I think. The longer you make it, the more stuff is in there that people could object to. We can have different views on the cause of the problem, and on details about how cures work and the ideal cure, but still agree on the general direction of a cure. I once helped organise a petition about academic freedom. I cut the original draft down from one page to IIRC 2 or 3 short sentences. When both the fundamentalist Christians and the Wiccans signed it, I knew we had won.
Getting academics to agree on anything is like herding cats.
Yep, have both government and central bank announce (the same!!!) NGDP target, and then give it both barrels, monetary and fiscal, until we are in danger of overshooting, and then adjust. And we can argue later about whether it was monetary or fiscal, or the target itself, that really won the war, when it no longer really matters to anyone except us.
OK, put this on a bumper sticker. Circulate a petition. Through it out at conferences and dinner parties until everyone knows you will talk about nothing else.
I don’t share your politics, Nick, and your association with the C.D. Howe Institute makes you suspect in lefty circles. But I can sign on with the both barrels thing. “Fiscal policy” is a dog-whistle to lefties.
If it works, maybe the NDP will make you Bank of Canada Governor. You can even ride around in the Covernor’s helicopter and pull the lever marked “Monetary Policy” which dispenses cash to the masses. The lever marked “Fiscal Policy” does the same thing but can only be used when the Minister of Finance is in the helicopter.
Nick,
My comments are here:
[link here NR]
Nick, you seem to have posted this just a bit too soon to have read Steve Randy Waldman’s latest: [link here NR]. Ships crossing in the night!
Here he proposes that the very wealthy hold most of their wealth as insurance, not as deferred consumption. He goes on to say that whereas the latter usage of wealth depends on absolute real value, the former is zero-sum, depending on relative value, and that consequently “there is no such thing as a Pareto improvement” because a transformation that leaves everyone better off in consumption terms at the price of compressing the difference between ranks would decrease the welfare of the very wealthy.
In SRW’s view, the wealthy are likely to oppose any measure that increases their wealth if it damages their relative standing.
Phil Koop: I once read a book by Edward Luttwak
http://en.wikipedia.org/wiki/Edward_Luttwak
(don’t remember which but I think it was
Coup d’État: a practical handbook
[link here NR]
[link here NR]
where he said IIRC : There are essentially two social models.Sweden: Maximum stability with maximum equality and minimum oppression. Haïti: maximum stability with minimum equality and maximum oppression.
The powerful monied interests need to demand a higher rate of interest, which only a looser monetary policy can achieve.
One possibility, in the eurozone the powerful monied interests want less progressive taxes, smaller government, lower pensions, and labor market de-regulation. But the eurozone has democratically elected governments who will not agree to this.
Therefore the powerful monied interest have captured the ECB. The ECB will not discount government bond debt at the policy rate until the governments agree to structural reform demands of the monied interests. What does it matter if the risk-free rate is 1%, if huge risk premiums are charged to all borrowers?
So there is already a game going on, in which the ECB ensures tight money for governments until the policy agenda of the monied interests is enacted.
J.W. Mason has a great article in which he points out that the ECB is giving all sorts of political advice to the governments:
[link here NR]
Yglesias follows up with “The Discipline and Punish” view of interest rates:
[link here NR]
You are asking that the ECB switch to a completely different game.
From the point of view of the monied interests, they look across the Atlantic at their North American peers, in which 40% of the wealth is owned by 1% of the people, and 93% of income gains regularly go to the top 1%, and think “why can’t I have that?”.
Whereas you are promising just a few extra points of GDP for the EMU as a whole.
“The powerful monied interests need to demand a higher rate of interest, which only a looser monetary policy can achieve.”
But that way (also/instead) lies inflation, the absolute bane of the monied interests, because it transfers shares of buying power from (a relatively smaller and highly influential number of) creditors to (a relatively larger but politically much weaker group of) debtors.
One extra point of (okay: unexpected) inflation transfers hundreds of billions of dollars of real buying power per year from creditors to debtors. ‘Nuf to make “the monied interests” sit up and take notice…
And: isn’t all (extra) inflation “unexpected,” especially after a “great moderation” engineered via decades of monetary easing? We’ve got authoritative voices telling us to expect both (hyper)inflation and deflation. Eight Ball Sez: “The Future Is Unclear.”
What rsj said and his link to JW Mason. Like it sooooo much. And what Ritwik said. Where’s the smiley for bowing down because I am not worthy?
I find it hilarious that Nick thinks “pension plan” and “capitalist” belong in the same sentence.
Dear Nick, that’s not capitalism. Please use my new definition to say what you mean.
Ah Morgan. I wondered when you would find this post. There are many definitions of “capitalist”. The one I was using here, slightly tongue in cheek, is a person who derives part of his current or future income, directly or indirectly, from past saving.
Nick
Here you have it – why your capitalists are not ganging up.
http://www.ft.com/cms/s/0/b42950fc-dee0-11e1-b615-00144feab49a.html#axzz22m6bOWWW
They’re too frigging scared. They don’t want to invest in a world which they do not understand. They want smooth flows, predictable returns. All at low cost. They are the very antithesis of what Schumpeter held dear about capitalism, and for too long they have gotten away by predicting labour market catastrophe if their interests were not taken care of.
No longer, You don’t get return unless you take risk. You don’t get return for investing in a money market mutual fund, an absolute return fund, a capital protected note. You get return if you’re Peter Thiel. You don’t get return if you’re GE. You get return if you’re Apple. That’s the way it should be.
The money demand has to come down. The natural rate on money has to go up. The risk has to be borne, and asset purchases will not help that.