Why isn't NGDP targeting a lefty thing?

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.

Comments

[Ralph Musgrave]

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

[Nick Rowe]

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.

[Frances Woolley]

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).

[JKH]

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

[JL]

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/

[Rob]

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.

[Bill Woolsey]

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.

[JL]

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.

[Nick Rowe]

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?

[JL]

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.

[Alex]

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.

[JKH]

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.

[JKH]

meant MM NGDP targeters

[Nick Rowe]

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.

[Nick Rowe]

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.

[Jon]

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.

[Nick Rowe]

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.

[Kosta]

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.

[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. 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.

[Nick Rowe]

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.

[David Pearson]

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.

[Wonks Anonymous]

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.

[JL]

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)

[Nick Rowe]

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!

[Gepap]

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.

[Nick Rowe]

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.

[Bill Woolsey]

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.

[Frances Woolley]

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".

[JKH]

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.

[David Pearson]

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?

[David Pearson]

I should have said "lowering the corporate cost of capital" by share repurchases, not boosting profit.

[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?

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.

[Nick Rowe]

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 ;-)

[Gepap]

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).

[Nick Rowe]

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).

[Nick Rowe]

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.)

[JL]

"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.

[Bill Woolsey]

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.

[Gepap]

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.

[David Pearson]

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.

[Ben Daniels]

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.

[Gregor Bush]

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.

[K]

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.

[Nick Rowe]

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.

[UnlearningEcon]

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.

[Patrick]

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?

[Nick Rowe]

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.

[Nick Rowe]

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.

[Nick Rowe]

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 ;-)

[Patrick]

See, I knew there was room for compromise.

[RebelEconomist]

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.

[Determinant]

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.

[studentee]

"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

[Steve Roth]

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?

[studentee]

"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

[Mandos]

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.

[Daniel I. Harris]

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!

[Steve Roth]

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.

[OGT]

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.

[Gregory Sokoloff]

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!

[Determinant]

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."

[Kosta]

[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.)

[Kosta]

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.

[reason]

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).

[reason]

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.

[reason]

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

[reason]

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.

[Alex]

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.

[Ralph Musgrave]

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.

[Alex]

The UK inflation report is out aaand the pony isn't in there.

[Nick Rowe]

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.

[Dan Kervick]

... 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.

[Nick Rowe]

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.

[Gizzard]

Nick

This is the best post and best round of comments Ive ever seen here, almost anywhere really. I mean that sincerely

Thanks

[Nick Rowe]

Gizzard: Wow! Most unexpected. Thanks!

[Nick Rowe]

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?

[Gizzard]

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.

[Scott Sumner]

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."

[Mandos]

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.

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.

[Gizzard]

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.

[Gizzard]

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.

[Nick Rowe]

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.

[Nick Rowe]

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?

[Mandos]

1. 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.

2. 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.

[Nick Rowe]

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

[Nick Rowe]

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.

[RG]

Nick -

Your monetary hot potato thought experiment is a fiscal transfer, i.e. central banks as currently mandated cannot do what you describe.

[Nick Rowe]

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?

[Nick Rowe]

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.

[Mandos]

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.

[Mandos]

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.

[Nick Rowe]

Mandos: OK. The bakery analogy works.

[Peter K.]

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.

[Peter K.]

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.

[Gizzard]

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"

[Nick Rowe]

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.

[Nick Rowe]

Peter K. Good! More lefty NGDPers coming out! Restoring my faith that the world makes some sort of sense.

[Steve Roth]

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.

[JL]

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!

[studentee]

"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.'