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""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."

why did you ask this question as if dan didn't have any 'who' and then proceed to name 'who'?

Targeting NGDP is also targeting nominal income, which you would think would make it an easier "lefty" sell. I find this debate a bit odd in another way, in that inflation targeting was introduced in Australia under a centre-left government (the Keating ALP Government). It was made explicitly business-cycle flexible under a centre-right government (the Howard-Costello Coalition Government). An "average over the business cycle" inflation target is very similar to a NGDP target anyway. But fiscal policy under both sides of politics has become significantly about keeping the policy space "open" for the Reserve Bank.

And yes, that does mean government spending becomes more "cost-benefit" focused, but that actually tends to work better for lower-income groups, their benefit being taken to be a positive. It is just part of my puzzlement about why there is not more learning from the Australian example.

Peter K: Targeting 7% uemployment? 7% the new NAIRU. Who gets to pick which 7% stay unemployed..... oh yeah the market. The same one that chose that 16% are unemployed now. The only unemployment target which makes sense is 0% . The target should be no person who wants to do something to earn some spending money will be denied that opportunity. Why picka target other than 0 . Maybe you dont make it but set your aim high. Its impossible to overshoot 0% unemployment.

Nick

You said earlier you were simplifying and not subtracting anything form my thought experiment. You said

"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."


If you are consuming all your income, why would you take on a loan, even an interest free one? You must have extra income in order to take on a loan. A guy with a printing press making a loan (never mind that printing money means NOT loaning it but giving it) would have no takers in my scenario.......... until someone figured how to consume less and save some money, but then all they need is bank loan against that future income. We dont have a hot potato because no one would take the guy up on his offer as you described it. But again, my point was about what is the basic nature of a bank loan, which is NOT a saver lending his money to someone who wants more. I'm still not sure what point you were driving at with thisaddition.

So what? That's preposterous, cutting out the middle man is the whole point! In that simple world sure everything works but to then transpose that outside of your academic office is not possible.

Commercial banks do not need the central bank (reserves) to lend money so whats the point? If central bank does this or not, bank reserves go nowhere other than between commercial banks.

Scott Fullwiler has painstakingly detailed the operational reality.

For me the basic objection is the objectification of money. Money is a great tool but that is all it is and by placing so much of our thought and desires on it we've distorted its purpose. NGDP while a slightly different approach to now (which is abysmal) still focuses on the object. Its like Christians who want to talk about the Bile as if the Bible is the object of their worship. The Bible *may* point to the object of worship but it undoubtedly is a lousy item TO worship.

Monetarists are obsessed with money. I would prefer an obsession with improving human lives which can be done with the dollar worth 6 Euros or 600 Euros.

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?"

Isn't Nick a kung-fu economist?

Left? Right? What foolishness!
Om. All skandhas are empty. Om.

I'm amazed that there is such a consensus around NGDPT.

- Leftists should be saying that monetary policy will not work in a liquidity trap and what we need is fiscal policy that is sure to work
- Rightists should be saying that huge monetary expansion is just kicking the can and what we need is real supply-side change to address the problems that caused the liquidity trap in the first place,

The real consensus is that both sides should indeed be calling on the CB to "do nothing".

"Charlie Evans of the Chicago Fed suggests targeting 3 percent inflation and 7 percent unemployment and I would support that as well."

Oh brother, in the Full Employment and Balanced Growth Act of 1978, Congress set the inflation target as not more than 3% and the unemployment target as not more than 4%. (15 USC 1022a). But when has the Fed ever paid attention to Congress?

"Its impossible to overshoot 0% unemployment."
True enough but it occurred to me the other day (as I was reading a Max Hastings book) that 1944's 1.2% unemployment rate might actually have been a negative number if the half a million German and Italian POWs working as farm laborers were counted as employed.

The meeting of the minds between MM and MMT (as I suggested at interfluidity) is for the Fed to buy up long-bonds and for Tsy, in term, to buy them back with coin seigniorage. After $5 trillion in platinum coins had been deposited with the Fed, the public debt would be no higher than it was when Obama took office. Doesn't do much in terms of fiscal policy, except that being $5T below the debt ceiling is not nothing.


- Leftists should be saying that monetary policy will not work in a liquidity trap and what we need is fiscal policy that is sure to work

That's part of what I was saying. We may need a monetary policy, but it's very premature to say what it should be, because the real problems are orthogonal to monetary policy. They're ones that leftazoids are concerned with, and from the point of view of mainstream economists, that makes leftazoids the children of a lesser god, intellectually speaking.

But the Euro crisis is showing to us daily that this god is a wrathful god indeed and won't be satisfied with just an occasional genuflection from Nick.

Targeting 7% uemployment? 7% the new NAIRU.

What happened to the old NAIRU? Oh yeah, a few insolvent banks and whoops!

NAIRU: If there's unemployment it's not our fault and if unemployment rises NAIRU changes so it wasn't us, honest.

No wonder central bankers love NAIRU. They don't have to take the blame for anything.

Could someone explain to me how monetary policy can target unemployment? Like Nick, I got that memo from the 1970s and 1980s that explained - pretty convincingly - that it cannot. Apparently I'm not up as up-to-date on these things as I once was.

By the way, there's a large amount of leftist writing particularly from the 90s that is about a vehement rejection of the 70s and 80s/Friedman memo to which I believe you have been referring. Linda McQuaig's book The Cult of Impotence for example. So no, not everyone got the Friedman memo. I mean, that memo is one of the things for which Friedman is principally hated.

Plus that's kind of half the point of the whole MMT tendency, which isn't strictly leftist, but still makes a sympathetic point.

Stephen: It's called a "Taylor rule"

"why did you ask this question as if dan didn't have any 'who' and then proceed to name 'who'?"

I was making 2 guesses. Just trying to be helpful. Dan never links to anybody and yet routinely asserts that "a lot" of people on the left think as he does.

K: The Taylor Rule is for targeting inflation.

Peter K, I can't give you any poll numbers. But it was always my impression that many on the left revere the tradition of FDR, Keynes and the New Deal, and long for a return to more activist government and renewed reliance on big, powerful fiscal policy tools.

Monetarism is a trickier issue, because it is more of a purely economic theory than a political orientation. But most people associate monetarism with Milton Friedman and other conservative and laissez faire Chicago school thinkers, both of which have long been the objects of the ire of the left. And one thing the large swathe of left-leaning economists who incline toward the various post-Keynesian schools seem to have in common is a commitment to models of endogenous money creation and the idea that bank lending and government spending drive money creation, which the central bank then merely accommodates, rather then the monetarist and quantity theory picture of central bank policy driving monetary expansion and demand.

This debate has been going on for many months, and all the monetarists can come up with is vague talk about expectations and the "money channel" when asked to get specific about the mechanisms by which their desired "targets" are supposed to turn into real effects on the real economy. Frankly, some of us think that monetarism represents a toolkit of placebos, rain dances and voodoo that amounts to nothing more than an impotent distraction. We don't think monetarist understand what really makes things happen in the real economy. We don't think adding more reserves to already swolen bank reserve accounts is going to make the economy move.

I check in on the Market Monetarist blogs all the time. Their audience is not exclusively right-wingers, but it is very predominantly right-wingers. Is that just some kind of coincidence? When Scott Sumner is not busy trumpeting NGDP level targeting, he is busy running down one left-wing policy approach after another.

Why does the left not support NGDP targeting?

Why does the right not support a government-run full employment program?

I agree with JKH at 9.27am yesterday.

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.

Nick, I believe some real wages are sticky, and it all depends on bargaining power. Wages don't move up because they are goosed by some all-pervasive monetary force. They move up because employers have some incentive to raise them. And the only time employers have an incentive to raise them is if they will lose their employees if they don't. And in the current circumstance, most people in America do not possess that kind of bargaining power.

It is only the case that a fall in wages is a necessary side effect of ending a recession inside the limited monetarist and neoliberal paradigms of how the economy works, and what policies are morally and politically appropriate. A lot of us just don't believe that recessions are efficiently ended primarily because something called "monetary policy" increases AD. There are a lot of different ways of ending recessions, but the most direct would be for the government to directly hire everyone who is unemployed. If they do that by pure deficit spending, then they have pursued a fiscal policy with a monetary policy component. But they could also fund the program by taxing away some of the surpluses of the wealthy - surpluses that are contributing little to aggregate demand - and transfer those surpluses to those who certainly will use them to boost aggregate demand.

Now you or some of your readers might be aghast at my shocking disregard for the sanctity of property rights and the efficient wisdom of the price mechanism. Fine. But don't pretend their is some big mystery about the fact that lefties want a world in which the public sector is very actively involved in the creation of wealth and employment and in the redistribution of wealth and income. That's what "left" is all about, isn't it?

As for what the central bank should target, I don't care all that much. But I am inclined to think they should focus their policy initiatives on interest rates, and on other means of modulating the flow of credit. Interest rates are the one thing I believe they have a demonstrated record of actually controlling.

Gizzard: "Targeting 7% uemployment? 7% the new NAIRU. Who gets to pick which 7% stay unemployed..... oh yeah the market."

I remember in the late 1980s when the market went crazy if unemployment threatened to go below 7%. :( Pricks!

Dan: "Nick, I believe some real wages are sticky,..."

I'm talking about sticky *nominal* wages, not sticky *real* wages. W, not W/P. A total failure to communicate. I did try, but I failed completely to get you to understand what i was saying. I despair. Look Dan, I know you are very bright and well-educated, PhD Philosophy, IIRC, but just grab a second year macro textbook and spend the day or two it would take you to read through it, please.

"Oh brother, in the Full Employment and Balanced Growth Act of 1978, Congress set the inflation target as not more than 3% and the unemployment target as not more than 4%. (15 USC 1022a). But when has the Fed ever paid attention to Congress?"

Isn't that obsolete? Thanks.

Nick I misspoke, but I was clearly talking about sticky nominal wages too. If the price level goes up and some workers do not get a raise, haven't their nominal wages stayed the same, while their real wages have fallen? And wasn't that the issue I was discussing? My claim was that, even if we can expect pervasive wage stickiness of this kind in response to a rise in prices - and I think we certainly can expect that given the weak bargaining position of labor - it is not at all necessary for this to be allowed to happen in order to boost employment and end a recession. That is only the case if you restrict the tools used to some combination of inflationist monetary policy and market mechanisms.

And while folks might be running away from this prescription now, it was clearly the prescription we were being presented with by a lot of the NGDP targeters until very recently.

"Isn't that obsolete? Thanks"

If you mean obsolete as in the military draft (that is, something that was once national policy but Congress has since repealed t), no, the Full Employment Act is still the law of the land (I was citing the title and section of the US Code where you can find it).

If you mean obsolete as in ignored with impunity like, say, the War Powers Act, then you may have a point.

Dan: NGDP targeting is about the slope of the AD curve.

Sticky nominal wages, sticky nominal prices, and what happens to real wages in recessions and booms, are about the slope of the Short Run Aggregate Supply curve.

It doesn't matter whether the AD curve is vertical, horizontal, or downward-sloping. If you shift the AD curve up/right, it is the the slope of the SRAS curve, and why it has that slope, that tells you what happens to real wages.

What Scott Sumner believes about the SRAS curve, and what I believe about the SRAS curve, are two different things. We have argued about it in the past. So I get pissed off when arrogant people who think they know it all but who have (apparently) never read a basic macro textbook say stuff like:
"And while folks might be running away from this prescription now, it was clearly the prescription we were being presented with by a lot of the NGDP targeters until very recently."

And the bargaining power stuff is a long run matter that tells you about where the LRAS curve is, and what real wages will be when you are on it.

I'm tired now. But sometimes I feel this is all a complete waste of time.

Dan: "Why does the right not support a government-run full employment program?"

Did *you* get the Phelps/Friedman/70's memo? Do you know what I'm talking about?

It's about the inability of *AD policies* to get "full employment". Ever hear about a Conservative politician called Ted Heath? They tried, and failed.

You want to know why *I* don't support a full-employment program? Because the lefties go batshit crazy and say I should be dealt with using a baseball bat when I start talking about my full employment program. It's because you don't want to hear about it. Because too many of your sacred cows would have to be sacrificed to get it.

Sacred cows like minimum wages, unions, retirement arrangements and progressive income taxes?

Which is shorthand, Nick, for a contention that your full employment program is incapable of dividing the pie equally.

That's why I don't want to eat your baking.

Determinant: Nope. Wrong. That's a knee-jerk response that reflects all of your own prejudices, with zero analysis. Which again, epitomises so much of what is wrong with so many (not all) of the left.

Actually, I remember you posted about your vision for full employment, the "natural rate of unemployment" and how to get rid of it and you launched into something very much like that.

I was just naming my sacred cows that you said had to go and going on my memories of your plan.

So your full-employment plan includes unions, progressive taxes and defined benefit pensions for everyone?

Come now, out with your plan, Nick.

Bill Woolsey said: "Or are you worried about share prices rising enough to make investment profitable."

I may or may not be reading that correctly but ...

Is there a cheaper way for a business to expand than either issuing new bonds or issuing new stock?

From what I have read, NGDP targeting tends to ignore:

1) currency denominated debt (whether private or gov't)
2) current account deficit

Nick Rowe: "You want to know why *I* don't support a full-employment program? Because the lefties go batshit crazy and say I should be dealt with using a baseball bat when I start talking about my full employment program. It's because you don't want to hear about it. Because too many of your sacred cows would have to be sacrificed to get it."

Mmmm. Sounds interesting. :)

Stephen: "The Taylor Rule is for targeting inflation."


If you can't effect the NAIRU then in the long run I suppose every rule can only target inflation. NGDP targeting is a Taylor rule. Would you call it inflation targeting?

Determinant: "Sacred cows like minimum wages, unions, retirement arrangements and progressive income taxes?"

Nick: "Nope. Wrong. "

Too bad. Throw in a good citizen's dividend, scrap UI and welfare, and it sounds to me like a pretty good plan for a zero NAIRU.

So we'll determine what Nick's full-employment program is by defining what it is not?
This process of elimination might take a while, so lets get to it!

Is it less like Speenhamland or the workhouse?
http://en.wikipedia.org/wiki/Speenhamland_system
http://en.wikipedia.org/wiki/Workhouse

Determinant: your memory is bad. You are also being obnoxious.

OK, I can't remember it either. I'm assuming it wasn't instituting an anarcho-syndicalist society where "employment" and "unemployment" have no meaning, so we have both full and zero employment simultaneously. "Ceci n'est pas un job."

K: "If you can't effect the NAIRU then in the long run I suppose every rule can only target inflation."

Yep. A lot of people don't get that point. It's only in the short run that you can talk about the differences between (say) inflation vs NGDP targeting.

"NGDP targeting is a Taylor rule. Would you call it inflation targeting?"

That's not strictly correct. First, the Taylor Rule is a mechanical rule that tells you how to adjust the instrument in response to only two variables -- the inflation gap and the output gap. Inflation targeting lets you look at all information to set E[future inflation] = target. NGDP targeting also lets you look at all information to set E[NGDP] = target. Also, the Taylor Rule takes a weighted average of the output *gap* and *inflation*, whereas NGDP is like an average of output (no gap) and the *price level*.

You can think of a Taylor Rule as a mechanical way to implement flexible inflation targeting. But it will consistently miss the target in the long run if you miss-estimate potential output or the natural rate.

So it really does all center around adoption of the NAIRU concept then, according to you. Another way of putting it is that, according to monetarists, we must always put workers at a disadvantage in bargaining power...

Some data points from the UK... Will Hutton is a British lefty who has advocated for NGDP targeting a couple of times recently:

http://www.guardian.co.uk/business/2011/aug/06/financial-system-a-madhouse
http://www.guardian.co.uk/commentisfree/2011/oct/29/planb-economic-crisis-britain

Giles Wilkes is a centre-leftish economist, advisor to govt cabinet minister Vince Cable, and sometime NGDP advocate:

http://www.centreforum.org/assets/pubs/credit-where-its-due.pdf

If the (current) UK government did propose NGDP targeting I'm pretty sure that many lefties would intuitively adopt the position that NGDP Targeting = Monetarism = Thatcher = Bad.

We didn't, in fact, get hyperinflation in the 1970s. And the average real GDP growth rates for the UK in the 70s, 80s, 90s, 00s were as follows: 2.42%, 2.48%, 2.24%, 1.70%. (TBH a big chunk of the 1980s is accounted for by the crazy housing bubble in the last two years of the decade, driven by the monetary policies that gave us the 1990s recession. I wonder what the numbers for the 80s and the 00s would be like with that exed-out.) Also, the UK didn't get back to the levels of unemployment for which Ted Heath is castigated above until 2004 - rather, we got back to the levels the Wilson/Callaghan government considered a failure in the depths of the 1974 recession, we never got back to the Heath-era level. FRED!

I am far from convinced the "Friedman memo" was anything but a costly and painful detour through the swamps. Given that it didn't, in fact, deliver higher real GDP growth or lower unemployment or macro stability (see current circumstances), what the fuck is it for? Where is the achievement? It's a nothingburger at best and at worst, just a cover for picking a higher level of unemployment on the Phillips curve for fundamentally political reasons.

Nick,
I will admit that on economistsview where most of the commenters are left of center, I'm a bit of an exception. And the feeling I have, is that US commenters are obsessed with narrow political bandwidth in the US. The US political system is so disfunctional that any idea of a set of related reforms adding up to an improved whole, is impossible - you need to concentrate on single policies. So they only think in this way - one policy at a time, never in terms of whole system reforms.

Mandos: an awful lot does centre around the NAIRU idea. That's what makes the vertical AD curve (targeting full-employment output, however you want to define "full employment") infeasible. NAIRU basically says that the Long Run AS curve is vertical, so if the central bank makes the AD curve vertical too, there's no long run equilibrium, because the two curves don't cross. (Except if by absolute total fluke the vertical AD curve is exactly on top of the vertical LRAS curve, in which case every price level and every inflation rate is an equilibrium).

There's another way to think about the same thing. There are limits to what monetary policy (or any AD policy like fiscal policy) can do. In the long run you can choose any inflation rate or price level you like. In the short run, if you get it right, you can help ameliorate *fluctuations* in output and employment (and maybe even real wages, though that depends). But you can't make output and employment permanently higher.

That above paragraph isn't quite right. Because if you can reduce fluctuations, that in itself might have long run effects on the average level of real income and employment, and real wages. In other words, if you can reduce the amount of "noise" created by AD shocks (and SRAS shocks), that might have beneficial side-effects on long run growth in real income, over and above being a good thing in itself.

Monetary policy, and AD policy in general, is about stabilisation. That's the consensus Mew Keynesian/Monetarist message. There are some things monetary policy cannot do. And if you want to do them, you need to find some other policy.

Britmouse: Good finds! I knew of Will Hutton, but didn't know he supported NGDP. I hadn't heard of Giles Wiles. And by googling, I learn that Vince Cable is the Liberal Democrat cabinet minister. (Left of centre, and in some ways left of Labour?). So there are more sensible lefties out there than I thought. That gives one hope.

Alex: you believe in a stable long run trade-off between inflation and unemployment? Do you have any sort of ballpark idea about the inflation rate that would minimise the unemployment rate in the long run?

reason: yep. The commentary on Mark Thoma's otherwise excellent (lefty) blog does depress me. And disfunctional US politics depresses me even more. The main reason NGDP is making little headway in Canada is that people can argue that it isn't much different from flexible inflation targeting, and the latter seems to be working quite well, so why change it? And that's a sensible argument, even if I think it's not exactly right.

There is something I do like about NGDP targeting. It's pretty much the ultimate expression of the logic of Goodhart's Law and the failure of the monetarists' intermediate targets. If you want a stable, growing economy, target a stable growth path.

Something else I like about it: it is action, and we need action.

To be honest, though, the first of those points is basically that it's not counterproductively stupid in principle and the second is just the joke from Yes Minister ("We must do something. This is something. Therefore we must do it!")

Alex: "To be honest, though, the first of those points is basically that it's not counterproductively stupid in principle..."

If we could get all our policies to meet that criterion, I think we would be doing rather well. There almost certainly is a better policy than NGDP targeting out there somewhere. It would be a total fluke if one single number could be a sufficient statistic for what monetary policy should be aiming at. But given the current state of our knowledge, my aspirations are not very high.

And BTW, if you did convince me that (say) 8% inflation would be best on average for keeping average unemployment low (with no other bad side effects), I would just say OK, let's target 11% NGDP growth. My own view is that going below 2% inflation on average could be bad, because of downward nominal wage rigidity, and fear of the ZLB, but I don't see any benefits from going much higher than 2%, either from theory or from the empirical evidence. In fact, if I just look at the data on unemployment and inflation over any long time period, and forget all about theory, it looks like the Phillips Curve slopes the "wrong" way. High inflation tends to go together with high unemployment. Though that does not imply causation, of course.

How can you believe in NGDP targeting *without* a tradeoff between inflation and unemployment? I mean, the whole idea is that you have two binding constraints - the lower one is the avoidance of depression, the upper one is some level of inflation that is considered unacceptable (by *shut up*, because *shut up*) - and a target between them. If we get too near the lower one, we inflate, if we get too near the upper one, we deflate. How is this not, operationally, a demand management exercise implying a Phillips relationship?

The mechanism of action may be different, but the final goal is to maximise GDP growth(i.e. minimise unemployment) consistent with an inflation level considered (by somebody for some reason) tolerable. Or, if you like, to minimise inflation consistent with a growth level (i.e. unemployment level) considered tolerable (by somebody for some reason).

Very few economists, whatever they claim, don't believe in some sort of implicit Phillips relationship. The 1980s monetarists and their political fans were always going on about "taking the medicine" and tough measures that would pay off in the future and "yes it hurt, yes it worked". To put it another way, put up with the unemployment for the sake of lower inflation.

Alex,

I assume that you are British. I don't know if you are old enough to remember the 1970s, but I am, and I would not like to return there. The inflation was not just a problem in itself, but symptomatic of an attitude that I see in the US today, which was a refusal to accept our structural problems, and to believe that more fiscal stimulus could get us back to prosperity. We may have had low unemployment, but a lot of employment was effectively borrowed from the future by using government aid to prop up redundant industry (coal mines) and create jobs (eg subsidising car plants to start up in depressed areas).

Unfortunately, the lessons from the 1970s seem to have been forgotten in the UK and US, perhaps wilfully by some, and the easy broad solution of a bit more inflation seems to be tempting us again. Although its academic supporters may mean well, I suspect that much of the growing support for NGDP targeting is because it provides intellectual cover for inserting the thin end of the inflation wedge.

We are told that the effect of monetary policy on real activity is temporary and accidental (eg due to sticky prices etc). Given that, I would rather have the central bank focus exclusively on price stability and let, if not force, the elected government to nurture real activity. For example, there are many fiscal measures that the present UK government could take to boost real activity, but avoid because they could involve political cost (eg shifting the burden of taxation from labour income to property).

Alex: "How can you believe in NGDP targeting *without* a tradeoff between inflation and unemployment?"

Aha! I *do* believe in a *short run* Phillips Curve trade-off. In the short run, shifts in the AD curve whether caused by monetary policy or which monetary policy failed to prevent) cause real output and employment to fluctuate. Every Monetarist and New Keynesian believes this (or something very close to this). If I didn't believe this, my macroeconomics would be *very* different. I would be a Real Business Cycle theorist instead. I wouldn't have put forward my slogan "recessions are always and everywhere a monetary phenomenon". If I didn't believe this, I really wouldn't care much about whether we had an NGDP target, a strict inflation target, a gold standard, or targeted the price of fish.

It's the *long run* Phillips curve trade-off I (mostly) don't believe in. Nor does any New Keynesian or Monetarist (roughly speaking). Nor does (hardly) any economist, since about 1980. Before the 70's, most economists did believe in the long run trade-off.

That's what the Phelps/Friedman/70's memo was all about. Short run trade-off, yes, Long run trade-off, no.

Rebel: You're an old guy, like me! (I left the UK just before the Winter of Discontent, when it all really came to a head). Yep, that lesson is seared in our brains. But we want to be a bit careful not to fight the last war though. There is a chance we might now be overdoing it in the opposite direction. It *may* be that the natural rate of interest is permanently lower than it was then.

I gather from many British people that the opposite lesson was seared into *their* heads---never, if you can help it, let Thatcherish people into power.

Y'all (mostly from North America, I assume) are morning people. Ick. On most blogs, I have the run of the comments section to myself even at this hour.

Mandos: If (say) Tony Blair had run for PM in (say) 1970, which party would or could he have run for? On economic policy (if not on immigration) wouldn't he have been to the right of Enoch Powell? How does the old Beatles song go? "One for you 19 for me, taxman Mr Wilson/Heath" 95% marginal tax rates. Wasn't it 40% under Blair?

As someone said before, the Monetarist/keynesian wars ended when the Keynesians agreed to all the monetarist economics, and the monetarists agreed to call themselves New Keynesians.

Yeah, I got up too early. Babysitting by daughter's dogs. Letting myself get annoyed at (some) lefties.

Right, and that consensus ever since has alienated the economics profession from the left. Obviously, being a deliverer of such, I think that the ire is justified. The result of inflation angst has been a chipping away of the middle class, and a restratification into feudal hierarchies.

If (say) Tony Blair had run for PM in (say) 1970, which party would or could he have run for?

That's easy. "The one that looked like winning".

We may have had low unemployment, but a lot of employment was effectively borrowed from the future by using government aid to prop up redundant industry (coal mines) and create jobs (eg subsidising car plants to start up in depressed areas).

Come on, man. You can have "the great unemployment was inevitable because the British economy was structurally ruined". Or you can have "the Thatcher policy was necessary". But you can't claim that it was both structurally inevitable and also the effect of policy choices. And you're doing the economist trick I referred to above of denying that disinflation causes unemployment (no tradeoff) while also lecturing me about "easy broad solutions" (suddenly there is one! and we've got to choose unemployment because....er...here's some moralising rhetoric).

And, as I pointed out above, either way it wasn't effective. Real GDP growth was a hair higher in the 80s than in the 70s, and substantially lower in the 90s and 00s.

Nick: OK, but NGDP targeting is still an just an inflation targeting rule by the standard of the very long run (assuming we know where full capacity lies). *Everything* is just an inflation target, so when Stephen calls a Taylor rule "inflation targeting" he's not saying very much. The whole point is the policy trade off between inflation and real variables.

"It's the *long run* Phillips curve trade-off I (mostly) don't believe in. Nor does any New Keynesian or Monetarist (roughly speaking)."

I think we need to define "runs." There seems to be lots of talk about an upwardly shifting NAIRU so the "long run" is sometimes curiously short. If we depress the economy for a few years (with monetary policy!) then capacity starts to drop. So by long run, do we mean that after another great depression and countless destroyed lives then (assuming we haven't all killed each other) knowledge will still be preserved, a new generation can be educated, and after a few decades growth should be pretty much back to normal (albeit a few decades behind trend)? And how is that "run" relevant to today's monetary policy? It seems to me that to the extent that it is unable to restore equilibrium within a couple of years there is nothing neutral about monetary policy. And a Taylor rule (or any other policy rule) is about real variables every bit as much as it's about nominal ones.

BTW, I also remember (most of the) 70's and the 80's. As I remember it inflation wasn't so bad. It was the disinflation (the hard stop at the bottom) in the early 80's that really hurt. But seriously! There is no point in arguing about which one was really actually worse. Let's stick to the GDP/unemployment numbers.

"You want to know why *I* don't support a full-employment program? Because the lefties go batshit crazy and say I should be dealt with using a baseball bat when I start talking about my full employment program."

Just as I thought. The political economy you seek with NGDP targeting is literally unspeakable.

No thank you.

Mandos: "Right, and that consensus ever since has alienated the economics profession from the left. Obviously, being a deliverer of such, I think that the ire is justified."

OK, but suppose we think that consensus view is the correct one? That there is in fact no long run trade-off between inflation and unemployment? That permanently higher inflation will not in fact lead to permanently lower unemployment?

What do you want us to do? Lie? Just so we don't alienate the left, and arouse their ire?

Actually, when I read bob macmanus' comment, with its mixture of total ignorance, and implicit endorsement of thuggish silencing tactics, I really wonder why I bother to engage the left at all. I have to remind myself that not all of the left are like that.

"Bow to empiricism" would be good. The UK didn't, in fact, get higher GDP growth. It did get unemployment. Whether we got consistently lower inflation (it was pretty high at times in the 80s), and if so to what extent it was endogenous, and whether it was worth it, are all open questions.

I'd be more willing to abandon the notion that you can have lower unemployment if you tolerate higher inflation if the other side were willing to abandon the notion that you can have lower inflation if you tolerate higher unemployment. If you reject the tradeoff in one direction you've got to reject it in the other. That means no more moralising about tough measures and nasty medicine. That means no more internal devaluation plans, because you can't have the tradeoff only when you want it. Basically, if you give up your lockout I'll be happy to lay off the printing press.

Because the lefties go batshit crazy and say I should be dealt with using a baseball bat when I start talking about my full employment program

This isn't actually a quote from Bob, is it? Rather it's a strawman directed at some "lefties" somewhere or other who are conveniently not referenced.

Okay, a few points:

1. I think the fact that people are reduced to waving a memo about from the '70s says a lot about the prospect going forward of Economics the Science.

2. I am a leftist of some description, and a non-economist. I'm sympathetic to NGDP targeting, but skeptical. Mostly it boils down to an antipathy towards technocracy. There are lots of interrelated reasons for that, but here it boils down to a distrust of how objectively scientific economics is and can be (are the technocrats actually capable of what they say they are?), and also a total mistrust of the sorts of people are likely to be charge of this thing. It's my belief that "Set the financial markets free to diversify risk and pray to Alan Greenspan!" is what got us into this mess. Perhaps a "contract" model of central banks would be an improvement (where the guy in charge can be sacked if he fails to meet the target), but I'm not really sure why central banks should be independent in the first place.

3. Saying all that, I'm not sure I get Alex Harrowell's point. Firstly, I'm not sure that Chris Dillow post is correct. No-one could accuse Ben Bernanke of secretly targeting NGDP. Yet once you take VAT out the picture, UK inflation is in line with that in the US:

http://krugman.blogs.nytimes.com/2011/10/19/more-uk-inflation/

So if you're worried about price inflation with wages not keeping up thus screwing the poor, surely we must:

(a) make sure people have more money
(b) deal with commodity prices from abroad

The first is entirely consistent with NGDP targeting, since you can do the helicopter drop:

http://www.interfluidity.com/v2/918.html

On the second, we could tackle energy prices. Like, I don't know, renationalizing the energy sector, making sure every household gets the first chunk of energy at NHS prices (i.e. move the cost of energy off the poor and onto the taxpayer), and getting off oil and gas.

4. Nick Rowe, all the example of Tony Blair tell us is that if you leach off of Bill Clinton, shine shoes for Rupert Murdoch, and stumble after George W. Bush into various slapstick escapades, there will still be headbangers in the Labour party who believe his problem was that he didn't sh*t on the working class enough.

And I shouldn't get your hopes up about Vince Cable. He's not exactly Michael Foot:

http://www.bbc.co.uk/news/uk-politics-15034526

"Actually, when I read bob macmanus' comment, with its mixture of total ignorance, and implicit endorsement of thuggish silencing tactics"

It doesn't seem to me that that's what he's doing. It seems he's criticizing you for remaining silent about your secret full employment programme.

Alex: "I'd be more willing to abandon the notion that you can have lower unemployment if you tolerate higher inflation if the other side were willing to abandon the notion that you can have lower inflation if you tolerate higher unemployment. If you reject the tradeoff in one direction you've got to reject it in the other."

The New Keynesian/monetarist consensus already (and has always) seen this as (roughly) symmetrical in both directions. Starting in long run equilibrium, a loosening/tightening of monetary policy causes a temporary decrease/increase in unemployment, and a permanent increase/decrease in inflation.

(It may not be exactly symmetrical quantitatively, if the short run Phillips Curve is non-linear, which it probably is.)

And right now the US economy, for example, is not in long run equilibrium (I hope to God), which means that monetary policy is too tight.

Different Alex: "Perhaps a "contract" model of central banks would be an improvement (where the guy in charge can be sacked if he fails to meet the target), but I'm not really sure why central banks should be independent in the first place."

That "contract model" is, to a greater or lesser extent, roughly the idea behind current inflation targeting regimes. By specifying an observable target, you can make the central bank accountable. It makes an independent central bank more like an independent judiciary, which is supposed to interpret and implement the law, but not just make it up as it sees fit, but is relatively immune from political interference.

By "contract model", I meant an actual contract where the governor of the central bank would actually be sacked if they missed the target. There's a country that does this, but can't remember which.

"which is supposed to interpret and implement the law, but not just make it up as it sees fit"

That's the theory, but it hasn't worked out like that.

"is relatively immune from political interference"

It's free from democratic influence, but not political influence in general.

And again, I don't see why political interference is a bad thing - macroeconomic policy is inherently a moral problem.

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.

FWIW, I think Bob nails it perfectly here. Mervyn King has spent the last six months explaining that he could have hit the 2% inflation target but choose not to because it would have meant higher employment. Thank goodness we have such smart policy makers like Mervyn King, eh? Otherwise we'd be in a real mess. Oh, wait...

And it's not just micro- managing - he also wants to macro-manage! King is very explicit about wanting to rebalance the UK away from C and G onto X and/or I. I don't know how he gets away it - it's central planning writ large, way outside his remit. Maybe just because everybody still fetishizes "manufacturing" and "investment", and knows that importing cheap stuff from China is obviously "bad".

(To be fair King is supposed to be a closet righty, and stands accused of supporting fiscal policy of nasty Tories etc)

Great discussion, BTW, good job.

"This isn't actually a quote from Bob, is it? Rather it's a strawman directed at some "lefties" somewhere or other who are conveniently not referenced."

The quote about the baseball bat is from Nick Rowe himself, above at 10:14 Nov 16, referenced by min at 11:34. Jeez

And Rowe, from a distance of 22 minutes and 6 lines of text, managed still to spell my last name wrong.

I do not trust monetarists, of either the neo-classical or New Keynesian variety. They have been a total disaster for thirty plus years, either incompetent or corrupted. But the arguments have been already in this thread.

Oh, and I didn't get the "memo" either. I was too busy living through the great economy of 1950-80 to notice the living hell I was enduring. And reading Minky on Keynes in 1976.

I notice than the MMT crowd, like winterspeak, haven't even bother to show up for this thread.

Different Alex: "There's a country that does this, but can't remember which."

I'm trying and failing to remember too. IIRC, the Governor of the Reserve Bank of NZ has his pay docked if inflation goes above or below the target zone?

Britmouse: Thanks!

Yep, the Bank of England case is very awkward right now. Inflation is well above target, but almost nobody wants them to tighten. It does look more in line with an NGDP target.

"A Lefty thing?"

Look, I can't remember Minsky on money, but I like the last chapter of JMK. Take G up to 50-60% of GDP, initiate a Beveridge ELR, command the commanding heights and regulate what's left of finance to an inch of it's life, and then I will look at the CB. if I allow one.

Yglesias, DeLong, and Krugman aren't even the center on my scales. Sweden might be near the center.

I'd really like to address the bit about "but what if it's true" but I dunno if I'll get to it before this thread goes stale. BTW, like gizzard, I do think that this has been one of the most productive threads of all time, because I felt like *some* the criticisms, if not accepted, were actually at least acknowledged. From my perspective, too many of these discussions begin from the premise that we don't have a coherent reason for objecting, or that we're speaking Martian.

BTW, re MMTers, if you look at my blog, I am, if not an MMTer myself, highly sympathetic to what they're trying to show, and think they've made some excellent points, even if I have reservations.

Nick: Sorry for the delayed response. I was a bit sloppy there; I mean weak/strong as in "what are the implications of assuming that the central bank can actually target NGDP?" The strong implication is that you're all set - NGDP is the only meaningful metric; the weak implication is that there is still a heck of a lot of work to do but at least the level of nominal output is taken care of (and a very weak implication might even want to alter the relative contributions of real growth and inflation so as to affect existing wealth and debt).

Alex on November 17, 2011 at 07:45 AM

"Come on, man. You can have "the great unemployment was inevitable because the British economy was structurally ruined". Or you can have "the Thatcher policy was necessary". But you can't claim that it was both structurally inevitable and also the effect of policy choices. And you're doing the economist trick I referred to above of denying that disinflation causes unemployment (no tradeoff) while also lecturing me about "easy broad solutions" (suddenly there is one! and we've got to choose unemployment because....er...here's some moralising rhetoric)."

I don't understand your point. In the absence of structural adjustment, the unemployment was inevitable when unsustainable job preservation / creation stopped. Mrs Thatcher's policy was to stop the unsustainable job preservation / creation. I don't see the conflict.

Inflation provides a relatively non-confrontational solution to three problems, which is what appeals to the BoE. It reduces the real burden of debt. It eases the adjustment of excessive risky asset prices. And it tackles uncompetitiveness by facilitating a stealth reduction in real wages. But I am still against the inflationary solution, because it weakens the feedback from outcomes to actions. In my opinion, the most important British economic problem is the housing market. The most recent boom contributed to the British financial crisis (eg Halifax). Yet by not following through with the necessary action to hold inflation down, the BoE is largely avoiding a salutary bust in UK house prices, sending the message yet again that houses are a safe investment and preparing the ground for the next boom. Morals are irrelevant; it is about engineering an efficient economic system.

Mandos: don't worry about the thread going stale. I will still check in occasionally.

Thanks for saying it was productive. Overall, I think it was. Even if i got a bit pissed off at times.

Ben: understood. there's a helluva lot more to getting economic policy right than just targeting NGDP. And we could agree on NGDP, and disagree on a lot of other things.

Rebel: "And it tackles uncompetitiveness by facilitating a stealth reduction in real wages."

And I'm just going to repeat my disagreement with Rebel on that one point. A decrease/increase in real wages is neither necessary nor sufficient. My simplest model, which I think is roughly correct, is that all nominal wages and prices are equally sticky in a recession. The cure comes not by increasing prices relative to wages, or increasing wages relative to prices, but by increasing NGDP relative to both wages and prices. Sure, some prices are stickier than others, and some wages are stickier than others, but this is all a side-issue of the stickiness of all wages and prices relative to AD. Unemployment in a recession is not necessarily or usually caused by real wages being too high. Firms don't demand extra workers because they can't sell the extra output, and they can't sell the extra output because AD is too low.

Nick,

Well let me answer your question this way. It's one of those places where epistemology meets morality. It's a little premature to ask "but what if it actually is true" when we haven't even really come to an agreement on what it means for something like that to be true.

So now that we know that this NGDP debate is in some sense another episode of the NAIRU Warz, we should lay clearly on the table what's at stake. What it seems to mean, and you can correct me if I'm wrong, is that is simply a law of nature that workers must always be at a disadvantage in the overall social bargaining if we are to avoid some terrible fate of hyperinflation that is to be avoided at all costs. That is a VERY profound claim, so if we are to accept the "Friedman Memo" as an axiom going forward, it must be backed up by a huge amount of empirical evidence.

But all we apparently have is one data point, or, being charitable, a cluster of interdependent/related data points. What's more, as you see on this thread, the meaning and origin of that data point has long been disputed by the left. Especially in the 90s there was a raft of writing in rejection of the Friedman Memo, and that it seemed in fact that the 70s/80s episode was simply being exploited as an opportunity by someone who clearly had a good deal of malice towards labour (e.g. Chile).

But let's say that it were true, that the Friedman Memo about inflation is the correct explanation for the time for which it was issued. Then we have the other problem: by whose opinion was that inflation unacceptable? We see even in this thread people who remember that era telling us that the inflation was better than the attempt to control it. So what is the unacceptable level of inflation for which we must actively disadvantage labour? When do we get to vote on this apparently subjective level?

Then, of course, we get to the flip side of the issue: what's going on today. We're at the end of a 30-year experiment in holding down worker wage bargaining power for the sake of inflation prevention. (Keep in mind that worker bargaining power is more important in many ways than e.g. wealth redistribution to the left, in that the former is the ultimate prerequisite for the latter.) So in that sense we've consistently been hitting less employment than permits workers to bargain up their wages for a long time now. And now it is time to harvest all the rotten durian.

Why, when we see the catastrophe slowly unfolding, is this not seen to be as much of a crisis as the 70s episodes? Why is this policy also not seen as likewise unsustainable---in fact, it's quite the opposite, you have Europe's elites locked into some sort of crypto-Austrianity? It seems to me that if there *is* a level of inflation that we can all agree we should avoid, then we are trapped between a rock and a hard place. If everything you say is true, and with this crisis unfolding as it has, there does not seem to be any sustainable policy at all.

Or, it could simply be the case that one of these is wrong. Based on what I have seen, and based in the certainty that you really can't easily separate economic from the dirtier parts of politics, I would place an epistemological bet against the Friedman Memo.

Some comments and then a question to Nick


This has been a great thread and I think its because Nick has posed a question in an effort to understand his detractors, always a good thing. I need to do more of it myself.
I wish there were reply buttons to each post when so many people say things worth commenting on. You might consider it Nick.

What I take positive so far is that its clear the only answer from the "right" to the "Why dont we have full support for a full employment mandate" question is we cant afford it.
The thing is, its NOT the typical "we cant afford it" (as in we dont have the money), which has been the rights entire framework for almost all economic discussions the last three years. Using the "no one can spend more than they earn for very long" type arguments has been a staple of right leaning commentary and criticism but now, at least here in this thread its clear that the objection is solely, "It will make things too expensive for the wealthy". I want to see THAT question answered THAT way by someone like John Boehner (and count the milliseconds before he has to start walking it back) at a time when fewer average Americans can afford food, mortgage, and health care. I think the response would be GOOD! Things should be more expensive for you. Welcome to our world fellas.


Nick: Tell me what set(s) of data points would shake your core economic beliefs about the validity of your monetarist models? Surely something could convince you that you are off track. Your such a data and model guy there must be something that would make you go hmmmmmm, maybe those MMT guys have a real point.

Mandos: OK. let me try.

You think in terms of labour's bargaining power. Most orthodox economists don't think in those terms, but I can. So I'm going to translate the Friedman/Phelps memo into the language of bargaining power. Labour gets some share of total output. You think it should be higher, and the share of "non-labour" (land, capital, CEO's?) should be lower.

1. Suppose we start out with stable low inflation. Then we increase AD. This increases output and employment. Unemployment falls. Labour's bargaining power increases, because the demand for labour increases relative to supply. But what about "non-labour"? Might not the bargaining power of owners of land, machinery, and CEOs, increase too, if demand for them increases relative to supply? They all have higher bargaining power to demand higher wages/rents/salaries. We can't say a priori which group (labour vs non-labour) will get the biggest increase in *relative* bargaining power. If worker's bargaining power rises, but rises less than the bargaining power of non-labour, wages will fall relative to the rents/salaries of non-labour. It depends. We have to look at the data. And economists have been arguing over that data ever since Keynes General Theory (which seemed to predict real wages would be countercyclical, rising in recessions, and falling in recoveries). This is not an area I follow closely, but as far as I know they are still arguing over it. It depends how you measure things. The safest conclusion to draw is that there is no obvious empirical relationship between real wages and cyclical fluctuations in unemployment.

2. Leave that aside. Or even suppose that real wages are procyclical. There's another problem. If you increase AD, and all groups find their bargaining power has increased, you get a wage-rent-salary-price spiral. Each group that gets a bigger share reduces the share of the others, who then push for and get an even bigger share. And that spiral has no limit, as soon as people figure out what's going on, they anticipate rising prices and demand and get an even bigger increase in wage/salary/rent/whatever. Unless people consistently underestimate inflation, there is no limit to actual inflation.

If there were a limit to inflation, because people just never cottoned on to what's happening, and if labour's bargaining power rose more than non-labour's bargaining power, then it would make sense to ask what level of inflation would be acceptable for an increase in real wages. But if there is no limit, because people do eventually cotton on, then the only question that makes sense is whether infinite inflation is acceptable. And that doesn't make sense. Because if inflation where infinite, there wouldn't be a monetary system in any case, so we couldn't even talk about AD.

Even if it works at all to raise real wages, it can't work in the long run unless people are permanently fooled by inflation.

That's the Phelps/Friedman "accelerationist" memo translated into the language of bargaining power.

Gizzard: "Using the "no one can spend more than they earn for very long" type arguments has been a staple of right leaning commentary and criticism but now, at least here in this thread its clear that the objection is solely, "It will make things too expensive for the wealthy"."

Let me be clear. That's not my argument. Unless the paper and ink is very very expensive, we can afford to print as much money as we want to increase AD. And if an increase in AD increased output and employment it would (very probably, IMHO) make both the wealthy and the poor better off.

At times like the US right now, I think an increase in AD would increase output and employment, and make almost everyone better off. (A few people, who held all their wealth in very safe nominal assets like 30 year government bonds would be worse off, but mostly by reversing the gains they made over the last 3 years).

But there is only so far you can push that increase in AD. You can fix the temporary high unemployment associated with recessions. Which is good, and should be done. But if your definition of "full employment" means what it sounds like it means, and not just "the level of unemployment that seems to be sustainable in the long run without accelerating inflation", AD policy alone can't get you permanently to full employment.

You really can fix some problems by printing money and throwing it at the economy. But you can't fix all that way.

What data would disconfirm my view? A really good experiment, where you split all the countries in the world into 2 groups at random, tell half to target 2% inflation and the other half to target 20%. Then see what their unemployment rates are 20 years later.

Wouldn't pass the ethics board though.

Actually, even a good scattergram that showed a good trade-off between inflation (above 2% say) and unemployment, using decade average cross country data would make me pause.

And I have seen that sort of scattergram, and it does make me pause a bit. But it slopes the wrong way. Inflation and unemployment seem to be positively correlated, if anything. But that might just be something else causing both. Screwed up countries have high inflation and high unemployment.

Nick Rowe: "There's another problem. If you increase AD, and all groups find their bargaining power has increased, you get a wage-rent-salary-price spiral."

Just a comment, which is similar to some things that I have said before. It is not all that unusual to see what appear to be runaway feedback cycles in human systems. But usually they do not continue for very long. Which means that other factors are at play than exist in the runaway model. From what I hear, real life hyperinflationary spirals only have happened when there was some serious problem (like war). Is that right? Have there been hyperinflationary spirals under fairly ordinary conditions?

Nick Rowe: " A really good experiment, where you split all the countries in the world into 2 groups at random, tell half to target 2% inflation and the other half to target 20%. Then see what their unemployment rates are 20 years later."

How much does it matter what people are used to? (20 years, plus an official target, should help people get used to a certain level of inflation.) At the start of our current crisis, Australia seemed to benefit from having an inflation rate of 4%, while other developed economies had inflation rates closer to 2%. But what if 4% inflation were the norm in advanced economies? Would a 4% rate have provided some protection, or would it just have meant that deflation would have been more rapid? Thanks. :)

One hitch with your bargaining power translation, Nick. What if a rise in AD does not cause a rise in employment and production but a rise in imports? What if non-labour decides to arbitrage imports vs. domestic production? That is exactly what much of the retail sector in North America does. A good part of the manufacturing sector too.

Globalization (increased production in Asia, containerization, trade deals, etc.) have given non-labour an arbitrage opportunity they never had before the 1970's.

ISTM that that changes the inflation story a bit and skews bargaining power dramatically in favour of non-labour (managers, owners, shareholders...).

Secon point, why target labour instead of non-labour to provide an inflation anchor? ISTM competition could provide this anchor under the framework you just described. Yes, I know you have said previously that inflation-as-lack-of-competition is a discredited idea, but still.

Determinant,
I translate that as "but what about a dysfunctional international financial system?" If you are Canadian like Nick, you think the exchange rate takes care of external balance.

Here's a case study for you. Italy. Before joining the Euro, Italy basically as a matter of policy tolerated pretty high inflation (although not actually hyperinflation) and also enjoyed pretty high growth (one recalls when their GDP passed the UK's). After joining the Euro, super-German monetary policy was imposed. Theoretically, this should have squeezed the inflation out of the system, and the labour market should have cleared at lower wage (and price) levels.

That isn't what happened, though. Instead the Italians basically had a lost decade with low growth, high unemployment, flat real wages. But at least they didn't have any of that terrible inflation. They are now being castigated for not cutting wages in real terms sufficiently to compensate the effective currency revaluation of joining the Euro. To be honest I think this is moonshine - it's now officially forgotten that a big issue in southern Europe pre-crisis was the so-called "mileuristas", the underemployed youth getting paid €1000 a month or less (the Greek equivalent was €700), who couldn't afford to move out of their parents' homes or plan for a future in any way.

That isn't an example of a roaring labour market, and I suspect that something weird was going on with regard to the official inflation metric (CPI, which is ex-housing costs) and the concurrent housing bubble.

Min: "Which means that other factors are at play than exist in the runaway model.
Agreed. Something must be stopping the runaway inflation cycle, otherwise we would see them a lot more. My answer would be "the central bank's monetary policy". You only get that runaway inflation spiral if you have a vertical AD curve (and it's to the right of the vertical LRAS curve). Central banks know this. So they don't make the AD curve vertical (usually). When inflation starts to spiral up, they don't let the money supply rise in proportion. Or they raise interest rates. It all depends on what they target.

Min: it matters a lot what people are used to. In fact, you could say that it's only the *difference* between actual inflation and what people are used to that lets output and employment temporarily rise. That's why in stuck in that bit about 20 years and the inflation target, figuring that should be just long enough.

Australia is just like Canada, except they target 2.5% inflation instead of 2%.

(Oh look, the Reserve Bank of Australia has a dual mandate too:

"The Reserve Bank Board sets interest rates so as to achieve the objectives set out in the Reserve Bank Act 1959

the stability of the currency of Australia;
the maintenance of full employment in Australia; and
the economic prosperity and welfare of the people of Australia.")

There is a lot of debate over whether a 0%, 2%, slightly greater than 2%, inflation target is best. Most of us don't believe the LRAS (Long Run Phillips Curve) is literally vertical *everywhere*. We think the Phelps/Friedman/70's memo didn't get it exactly right. Maybe 0% is a magic number for nominal wage inflation, and/or price inflation, that it really hates to go below. Plus there's the ZLB problem for nominal interest rates. So most economists think it's safer to keep a 2% inflation target, just to reduce the risk. Some think it should be a little higher. Australia (and even moreso New Zealand) have tended to have higher real interest rates than most countries, for some reason nobody can really figure out. That (more than the additional 0.5% on the inflation target) helped them avoid the ZLB.

But yes, the lower your inflation target, the greater the risk of hitting the ZLB on nominal interest rates, and the greater the risk of hitting the ZLB on nominal wage changes (if it exists, and it seems to) for some groups of workers. I really don't want to target any less than 2%. Sometimes I wonder if 3% might be worth it. But level path targeting, either for the price level, or NGDP, would also reduce the risk of hitting the ZLB.

Determinant: "What if a rise in AD does not cause a rise in employment and production but a rise in imports?"

In countries like Canada, with flexible exchange rates, an increase in AD caused by loosening monetary policy tends to do the exact opposite. The exchange rate depreciates, and net export demand increases.

But there's a more general point here. Monetary policy can only do one thing. You can use it to adjust the overall level of AD, but you can't at the same time (and you can't at all in the long run), use monetary policy to affect the *composition* of demand, between (say) C+I+G+NX. Fiscal policy can be used to affect the composition of demand. If (say) you want to increase net exports, you run a loose monetary policy and tight fiscal policy.

"Secon point, why target labour instead of non-labour to provide an inflation anchor?" The Bank of Canada doesn't. Ultimately, in the long run, it can't. Because monetary policy can only do one thing. If it sees inflation rising above target, it doesn't matter whether that is because of higher wage inflation or non-wage inflation. It tightens monetary policy (if it thinks it's likely to persist).

The Bank could, if it wanted, target wage inflation rather than price inflation. Or it could target the inflation rate of gold, or wheat, or fish. The choice of target would affect which prices fluctuated more in the short run. But it should make no difference to average real wages in the long run (unless those fluctuation in the whole economy caused by picking a stupid target like gold or fish would cause lower long run growth, which they probably would).

Alex: that's actually a good example, and one I worry about. It doesn't make sense to me.

I agree that the standard argument we sometimes hear about "uncompetitive" countries like Italy mustn't join a common currency with Germany doesn't make sense. I did a post on it a month back:

http://worthwhile.typepad.com/worthwhile_canadian_initi/2011/09/the-euro-less-competitive-countries-and-the-neutrality-of-money.html

"That isn't an example of a roaring labour market, and I suspect that something weird was going on with regard to the official inflation metric (CPI, which is ex-housing costs) and the concurrent housing bubble."

I don't have any better explanation.

I keep planning to write a post on "marking my beliefs to market" on this. Just need to get inflation data from multiple countries over the last few years. I've always recognised that there is a lot of inertia/momentum in inflation. Once it gets rolling, and countries get used to it, it doesn't want to stop quickly. And there are some theoretical models that explain why this should be so. And that's a lot of what makes the short run different from the long run. But sometimes (not always) there seems to be a helluva lot of inertia, so the "short run" seems to last much longer than you would think it would. And I don't understand this. And I don't think any economist does.

Maybe it's all just that 0% wage inflation is a magic number. That seems to satisfy Paul Krugman.

http://krugman.blogs.nytimes.com/2011/11/17/subsiding-inflation/

I think that's part of it, but I don't think that's the whole story. Here's an old post I did trying to grapple with it (it's also a useful post for anyone who wants to see the Phelps/Friedman memo translated into bargaining power):

http://worthwhile.typepad.com/worthwhile_canadian_initi/2011/03/the-conflicting-claims-theory-of-inflation-and-unemployment.html

Determinant:

"One hitch with your bargaining power translation, Nick. What if a rise in AD does not cause a rise in employment and production but a rise in imports? What if non-labour decides to arbitrage imports vs. domestic production?

Globalization (increased production in Asia, containerization, trade deals, etc.) have given non-labour an arbitrage opportunity they never had before the 1970's.
"

Good point not getting much attention, well not as much as it should, both on the left and right sides of the aisle perhaps except perhaps Dani Rodrick in a limited sort of way.

"Free trade" issues being a sacred cow for both sides for diametrically different reasons ?

And, no, the exchange rate won't automagically correct the imbalances, it is a painfully simplistic point of view still oddly current at this time and age -- the problems are profoundly structural and political(No one can force China to float yuan, for example).

vjk: remember the difference between the nominal exchange rate, and the real exchange rate. Monetary policy can affect both in the short run, but only the nominal exchange rate in the long run. And trade is related to the real exchange rate.

@ Nick Rowe: Many thanks for your extensive answers. Most helpful, as always. :)

It seems to me that Nick and others, when talking about wages, seem to believe that there is a "right" or natural wage level that becomes discovered or revealed if one uses the right analytical tools. This approach seems to ignore the overwhelming influence of pure negotiation, at every level. Workers only get what they can squeeze out of the owner and no more. Its all a power play and much arithmetic has been wasted trying to "show" others that where this negotiation ended up is the correct or natural one. What we are able to get today is influenced by what someone else got yesterday, and if we go back far enough someone got NOTHING but 40 lashes for NOT doing something. There was a time when capital/owners got virtually ALL the gains. What economic models explained pricing of goods under those circumstances? Additionally, whatever the owner determined the price of cotton to be pre emancipation was the set point for pricing many goods and services in that economy, just like the price of oil will affect virtually every other good produced today. At a later point, when they actually had to start paying the people who picked the cotton, the whole price structure changed. Once the worker was emboldened enough to know that slavery was illegal, the owner still only paid just enough to keep the lot of them from ganging up and killing him.

I think Mandos has been alluding to much of what Im saying and with this in mind its clear to me that "economic models" serve as much use in examining wage/price relationships or the distribution of revenues between labor/owners/investors as looking at a baseball box score to try and determine what congress might decide. Like it or not it is and always will be a class war. Why Americans are so loathe to say such a thing I cant understand, they love wars as much as anyone in the history of the earth.

Surely Nick you cant suggest that you think non of what is happening is simply the result of a planned assault on workers in order to restore owners to their god given place in society. I think its been planned since the 80s ( the 30s really) and many in our economics profession have worked overtime simply trying to give credibility to scientific reasons why the world is the way it is for those who just want to earn a living wage and cant seem to.

Gizzard: "Surely Nick you cant suggest that you think non of what is happening is simply the result of a planned assault on workers in order to restore owners to their god given place in society."

I surely do suggest that. If I were planning an assault on workers to make them worse off and me better off, I wouldn't be causing unemployment by a tight monetary policy. That would make me worse off too. I would be pushing to introduce serfdom instead, like the Russian landowners did, when new land created an increased demand for labour.

Let me answer the rest of your comment: "No and Yes".

1. No. You are wrong. Whatever model you build of wage determination, as long as it doesn't have some irrational form of money illusion built in, will still give you a vertical LRAS.

2. Yes, just maybe, you could be right. It is (just barely) possible to build a model with an LRAS curve that is vertical, but *thick*. (I built one once, Roger Farmer builds them). There are multiple equilibria, like a ball resting on a perfectly flat table. In a model like that, anything can cause the ball to move. And the tiniest frictions could leave it in place. It is theoretically possible in a model like that for a shift in the AD curve to cause a permanent decrease in unemployment. But models like that are incredibly fragile. Lift one side of the table ever so slightly and it's no longer flat. I'm not sure they are credible.

Nick:

I am aware of the RER vs NER concept. The China case is the most vivid example where the Balassa-Samuelson conjecture fails, as well as the law of one price for tradables, as the country managed to maintain practically flat RER during the last decade despite the 10% growth rate.

The usual and the simplest explanation of the RER flatness is the suppression of NER due to the yuan/renminbi peg. An alternative theory is the "extraordinarily" high population savings rate, something I find hard to believe as being the root cause of the flat RER.

Canada isn't such a good example of a pure floating rate because our exchange rate policy and its practice is meant to accommodate shocks with respect to the United States. Nobody else is really a problem and really considered by business.

I'm thinking a sort of reverse Walras Law where Canadian trade for yuan cannot full clear at the same time as our US trade because China/US trade has an artificial constraint. You can't get (free market) general equilibrium in an system with n currencies when there is a peg between currencies p and q. That will affect everybody else.

Power grid models work on solving that very problem and that sort of constraint has a significant impact.

The Bank of Canada hasn't intervened in forex markets since 1998. Source

"yuan cannot full clear"

yuan/renminbi is not even tradable outside China. Legally, that is. Sort of like Soviet rouble.

I want to get back to this in detail including Nick's statement about the (counter)cyclicity-or-lack-thereof of unemployment but I am otherwise occupied possibly until Tuesday. However I would like to remark:

I surely do suggest that. If I were planning an assault on workers to make them worse off and me better off, I wouldn't be causing unemployment by a tight monetary policy. That would make me worse off too.

Brad DeLong said something not altogether different from this not long ago, and I assumed he was talking tongue in cheek. Of COURSE people regularly do things that make themselves worse off, if it makes SOMEONE ELSE more worse off than them. I would suggest that the destructiveness is very much part of the *attraction* of it. I've tried to make this point by writing "Wealth is relative" any number of times around here.

I mean, this is just repeated again and again, at all levels.

I would be pushing to introduce serfdom instead, like the Russian landowners did, when new land created an increased demand for labour.

But...that's what they did. If you follow any of the mortgage/debt battles in the USA, MERS, etc, it's pretty much effectively what is happening.

vjk: if a country uses *both* monetary *and* fiscal policy, it could in principle fixe both the nominal and real exchange rate (roughly). Suppose for example you use monetary policy to fix the exchange rate (standard Bretton Woods stuff). Then you loosen fiscal policy if the price level starts to fall, and tighten fiscal policy if the price level starts to rise. The standard Mundell Fleming macro model has this result.

Until recently, my guess is that that is roughly what China was doing (with exchange controls thrown in for good measure). But, IIRC, the real exchange rate has appreciated over the last year or so (I haven't checked).

Mandos: my guess is that Brad DeLong would not have been saying that tongue in cheek. But I would have to see the context.

"Of COURSE people regularly do things that make themselves worse off, if it makes SOMEONE ELSE more worse off than them."

Unless someone has really pissed you off, and you think they deserve punishment to deter them from doing it again, even if it's costly to you, that seems a bit pathological to me. And people who think like that are unlikely to get rich. "I'm not going to do this deal with you, even though it would make me richer, because it would make you richer still." is not the best motto for someone who wants to get rich. Sounds more like what you would hear from a society trapped in poverty, because they want to cut down all the tall poppies who try to escape.

Someone: "Of COURSE people regularly do things that make themselves worse off, if it makes SOMEONE ELSE more worse off than them."

Nick Rowe: "Unless someone has really pissed you off, and you think they deserve punishment to deter them from doing it again, even if it's costly to you, that seems a bit pathological to me. And people who think like that are unlikely to get rich."

Maybe not, but they are likely to stay rich -- at least, in relative terms.

Nick Rowe: "Sounds more like what you would hear from a society trapped in poverty, because they want to cut down all the tall poppies who try to escape."

Yup. Remember Chairman Mao's motto, "Let a thousand flowers bloom." He used it to identify and eliminate potential rivals.

Yeah, we are reaching the point at which the underlying axiomatic assumptions of How The Universe Works affects the method of modeling. Far more than just the tall poppy syndrome, history is simply replete with people who made suboptimal choices because because it was even less optimal for someone else. This is not just a Poor People Phenomenon.

So yes, we can all make each other better off if we really wanted to. But much of the time people don't, and often knowingly. Otherwise all the rich people in the USA would be at least *talking* like Warren Buffett, but we know the outsized effect of, say, the Koch brothers and anyone directly involved in mortgage shenanigans (which involves a lot of shooting self in foot).

Now economists seem to argue in general that these assumptions are necessary to make the models work. But instead we have a sort of model that...appears to separate the 30-year real wage stagnation in developed countries and the concerted austerity propaganda and bank behaviour.

This is a central complaint of the left when it comes to economics---that many factors that the left considers crucial are simply omitted. If you start from a perspective that makes the very notions of class warfare impossible in a modern context, why would anyone be surprised that your models don't demonstrate any class warfare?

Nick:

"But, IIRC, the real exchange rate has appreciated over the last year or so (I haven't checked)."

No sure about the last year, but the IMF IFS RER data referenced in http://www.hkimr.org/cms/upload/seminar_app/sem_paper_0_255_Tyers_Golley_Chinas%20real%20exchange%20rate%20puzzle_07.pdf show a flat RER graph between 1990-2006 which is quite remarkable (the article's author is in favor of "extraordinary" saving rate hypothesis attempting to salvage Balass-Samuelson).

Mandos: "Yeah, we are reaching the point at which the underlying axiomatic assumptions of How The Universe Works affects the method of modeling."

Could be. It is indeed (almost) axiomatic in (nearly all) economic theory that people (try to) do what's best for them, and don't do what's worse for themselves just because it makes someone else even worse off.

But that you would think very differently on this really did surprise me. Because I don't see the world that way at all (OK, there are exceptions). Is that a common view on the left? If it is, and I really hesitate to say this, but I can't help thinking: is the left "projecting"?

Why should people act in ways that make them worse off, if doing so also makes others worse off? Phrased in that way, such behavior violates Utilitarianism, yet it apparently happens. Power over people certainly seems to play a role. If I impoverish myself in certain ways, but impoverish you more, so that I gain power over you, maybe that is worth it to me, even in Utilitarian terms.

I remember being surprised, when I was studying negotiation, to learn that one negotiating tactic is to threaten one's own well being. For example, a prisoner, trying to cadge something from a guard, may threaten to throw himself against the wall, doing himself physical damage, and then claiming that the guard beat him up. "Even if they don't believe me," he tells the guard, "think of all the time you will have to put in to defend yourself, all the paperwork you will have to do." If the guard refuses, the prisoner has to be prepared to carry out his threat.

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