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.