Friday, September 28, 2012

For what purpose does the gentleman from Oklahoma rise?

I rise to revise and extend my remarks

The gentleman is recognized for one more blog post.


So let me try this again.

Nominal GDP growth is a sum (sort of) of two things. Real Growth and Inflation. Both are outcomes. The two things are not highly correlated with each other. One of them we like and one of them we (usually) don't like.

MMTers (NGDPists) frequently show graphs where a decline in output is correlated with a decline in NGDP and exclaim something like, AHA! THE FED HAS CAUSED THIS DECLINE BY NOT KEEPING NGDP GROWING FAST ENOUGH.

As I was pointing out yesterday, that can be a very tricky case to make because the decline in output is baked directly into the decline in NGDP!

That's what I thought (and still think) Mr. Avent was doing yesterday. But I don't think I actually called him an idiot as he seems to think I did though.

But then again I am so dense that I fail to understand exactly how the Fed is supposed to precisely target NGDP. They've kept the policy rate at zero for multiple years and promised to keep it there for multiple years more. They have flooded the banking system with reserves. But NGDP has not grown fast enough. Now the Fed has promised to keep the pedal to the metal after the economy has recovered, will that get NGDP growth where the MMTers want it?

In all honesty, the most I've been able to glean from the NGDPers is that the Fed should announce a NGDP path they are going to defend and ......

Create a futures market for NGDP and target its price?

Rely on the reverence people have for Fed announcements and sit back and watch NGDP happily conform to the announcement?

I am also so dense that I simply cannot parse some statements made by the NGDP crowd. Like this one from Scott Sumner:

NGDP is “the real thing,” whereas P and Y are simply data points pulled out of the air by Washington bureaucrats.

The man who implores us to "never reason from a price change" is now informing us that distinguishing between price changes and quantity changes is irrelevant or impossible?

Or this one from Mr. Avent:

Even in tough times, some people get raises. Those people capture some of the growth in nominal incomes, leaving a smaller chunk available to go to new incomes.

That's a real puzzler to this Okie. The raises ARE growth in nominal income, aren't they? Or does the Fed pour nominal income over the economy like cereal and we all scramble to grab our share and eat it before it's gone? Nominal income is not an exogenously imposed constraint on the activities of the private economy. Nominal income is largely created by the actions of the private economy.

I guess I just don't speak MMT very fluently.

the gentleman's time has expired

thank you mr. speaker.






7 comments:

Andy Harless said...

"The man who implores us to "never reason from a price change" is now informing us that distinguishing between price changes and quantity changes is irrelevant or impossible?"

I would note the distinction between actual prices and the imputed aggregate price level. For example, an interest rate is an actual price, and an exchange rate is an actual price, and, in Scott's view, these are things from the changes of which we should never reason. The CPI, and GDP deflator, and the PCE deflator, are not prices; they are dubious attempts to aggregate a multitude of prices.

Andy Harless said...

"They've kept the policy rate at zero for multiple years and promised to keep it there for multiple years more. They have flooded the banking system with reserves. But NGDP has not grown fast enough."

Wait, so only the policy rate and the quantity of reserves matter? In other words, Operation Twist was not just ineffective but truly a non-event?

For those of us who don't believe in Wallace neutrality, there's plenty more the Fed could do. In fact there are trillions of dollars worth of assets that the Fed could legally own but doesn't.

But even if you do believe in Wallace neutrality, promising, vaguely but without specific conditions, to keep the policy rate at zero for a long time is hardly the limit of what the Fed can do. What the Fed can do (although it's arguable whether it can do so credibly) is to promise to keep policy rate at zero until we are headed for the NGDP target path (or some other target path if you don't like NGDP). If the Fed were to do so and were to stick to its promise, then you must believe either (1) that we will eventually move toward the target path or (2) that we are in a permanent liquidity trap.

Now we can argue about Wallace neutrality and Fed credibility, and if you want to argue that Wallace neutrality is an adequate approximation and that that the Fed couldn't credibly commit to NGDP level path targeting, then you can argue that. But it's not an argument just to say, "Gee, seems like these guys are trying really hard and nothing's happening..."

James Oswald said...

I wrote this in an attempt to address your questions. It's too long for a comments section. Market monetarism is a very different way to look at monetary policy than other schools of thought and it does take some time to get used to.

Jim Oliver said...

If the peak oilers fears became true and fossil fuels suddenly became far scarcer, driving up prices would rather have the Fed tighten money supply because they are targeting inflation or would you rather that they target NGDP? If a new invention made many things cheaper would you have the fed loosen to keep prices up or target NGDP?

BTW I find your captcha to be too hard.

Gerardo said...

Do they teach market monetarism in graduate school?

James Oswald said...

I agree on the captcha. It always takes me a few tries.

@Gerardo: No, but if all you read were econ grad student bloggers, you'd think all they taught was market monetarism and Austrian economics. Market monetarism is a mostly blog phenomenon, but it has academic roots in the writings of F.A. Hayek, Irving Fisher, R.G. Hawtry, and Earl Thompson.

Jeff said...

Angus:

It sounds like your main criticism is that market monetarists are ascribing too much importance to NGDP targeting--that NGDP targeting is some sort of economic cure-all. That might be the impression one gets from reading their blogs posts, but that's not really the big picture message.

The big picture message is that NGDP targeting is a far superior monetary policy than the informal inflation targeting policy we've had over the last couple decades. That's a very important improvement, but its not the end of all economic problems.