Arnold Kling  

From National Affairs

I Don't Get This... Moneyball and Randomness...

The current issue (fall 2011) looks quite interesting. Some of the pieces you can now access on line:

1. On means testing for entitlements, Andrew Biggs writes,

There is an alternative approach -- one that achieves many of the ends of traditional means-testing, but without inviting many of its drawbacks. The plan's essential and distinguishing feature would involve limiting benefits based not on individuals' incomes in retirement, but rather on their lifetime earnings.

Means testing based on earnings or wealth at retirement would reward profligacy. Means testing based on lifetime earnings would, at the margin, reward thrift.

2. John Cochrane writes,

As the government pays off maturing debt, the holders of that debt receive a lot of money. Normally, that money would be used to buy new debt. But if investors start to fear inflation, which will erode the returns from government bonds, they won't buy the new debt. Instead, they will try to buy stocks, real estate, commodities, or other assets that are less sensitive to inflation. But there are only so many real assets around, and someone has to hold the stock of money and government debt. So the prices of real assets will rise. Then, with "paper" wealth high and prospective returns on these investments declining, people will start spending more on goods and services. But there are only so many of those around, too, so the overall price level must rise. Thus, when short-term debt must be rolled over, fears of future inflation give us inflation today -- and potentially quite a lot of inflation.

Even though he teaches at the University of Chicago, he is endorsing my view that hyperinflation is a fiscal phenomenon. I keep saying that the big inflation threat is not the Fed. Rather, it is the budget.

3. Scott Sumner writes,

the Federal Reserve should begin by adopting an approach of "level targeting" of nominal GDP. This doesn't mean keeping NGDP level, but rather targeting a specified trajectory, such as a 5% NGDP growth path, and committing to make up for any near-term shortfalls or excesses. Thus, if NGDP grew by 4% one year, the central bank would cut rates or engage in quantitative easing until its models yielded an expectation of 6% NGDP growth for the following year.

In terms of persuading leading Republicans, he has a way to go.

Not available on line is a piece by Chester Finn questioning the concept of a school district. You cannot tell from the teaser what alternative he proposes. Of course, just about anything would be better.

Comments and Sharing

COMMENTS (6 to date)
Craig writes:
Means testing based on lifetime earnings would, at the margin, reward thrift.

Would it? Or would it reward leisure over work as people chose to work fewer hours and take more leaves-of-absence?

fundamentalist writes:

The Fed has tried reducing interest rates and QEx's for three years, and yet their failure to revive gdp persuades Sumner that the Fed hasn't done enough.

So if the Fed did everything that Sumner wants and failed again, Sumner would just argue that they didn't do enough or didn't do it right.

I would love to hear from Sumner what evidence he would accept that could indicate that monetary policy doesn't work the way he thinks it should.

Norman writes:

fundamentalist, I believe Sumner would say if the Fed made it a stated policy to keep NGDP following a certain level path, and markets find the policy convincing, yet we still see sustained 9% unemployment, he would have to reevaluate. At least, some of us mostly convinced by his arguments would reevaluate.

The reason the evidence you mention does not lead me to reevaluate my view is that the whole argument is about expected paths of nominal variables, not current levels. Sumner has said before that no amount of dropping rates or QE will be enough as long as the Fed hints that it will undo any increases later. That's the whole point of level targeting: if the Fed misses the target, everyone knows *exactly* how far the Fed will go next.

Of course, this requires the Fed be willing to tolerate any degree of inflation or deflation to get back onto the target path, but if this became the preference of the Fed it probably wouldn't take much actual intervention to stay on path. If the expectation is there, it will do almost all the work; if it's not, temporary asset swaps just won't cut it.


Regarding the Cochrane quote, I think it's interesting that he seems to be firmly defending the idea that there is such a thing as Aggregate Demand, and there plenty of it. He sees the supply curves for assets, goods, and services as vertical (or nearly so), meaning any increase in demand over what we see now will only feed into higher prices. And all this will come from reduced demand for bonds, which implies he is expecting bond rates to skyrocket at any moment. I would be interested to see why, in his view, markets are placing so very little probability on what he sees as an imminent event.

Although still firmly in the mainstream, I think there is something to be said for the Recalculation story and its emphasis on slow adjustment of the supply-side of markets. Cochrane's story, on the other hand, just doesn't seem to fit.

John T. Kennedy writes:

Just powers are derived from consent. I would ask how citizens in general *can* have informed consent for Sumner's monetary prescriptions?

Until such informed consent exists, how could it be just to implement Sumner's plan?

Philo writes:

You quote John Cochrane: "fears of future inflation give us inflation today -- and potentially quite a lot of inflation." But this is only half true. There is *a lot* of fear of future (high) inflation around today, but it is not giving us (high) inflation right now. It is *tending* to produce inflation right now, but that tendency is being overwhelmed by other, contrary factors.

Scott Sumner writes:

Over the past 30 years NGDP targeting has been reasonably popular among conservatives. Bennett McCallum favors it, and I seem to recall it had favorable mentions from people like Taylor and Mankiw.

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