Scott Sumner  

Mr. Krugman's peculiar post

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Paul Krugman seems annoyed by the recent modest success of market monetarism, at least in terms of becoming part of the discussion. But the post contains only one tiny critique of our actual policies:

I don't buy this on the economics; to do what's needed central banks either have to take on a lot of risk, which is in effect a form of fiscal policy, or change inflation expectations, which is far beyond conventional monetary policy. But we don't need to hash this out here. The more important point is that the neomonetarists are deluded in imagining that there is any constituency for their ideas in the modern conservative movement.
Lots of problems here. The country that came closest to NGDP level targeting in the recent cycle was Australia. Their NGDP grew at a 6.5% rate during 1996-2006, and at a 6.5% rate during 2006-12. As far as I know all the other developed countries saw significant NGDP growth slowdowns. Australia never hit the zero bound, and its ratio of monetary base to GDP is a measly 4%. In other words, a small balance sheet and no risk. Adoption of market monetarist policies would actually reduce central bank risk. In any case, central banks are part of the consolidated government balance sheet (de facto) and any bond price risk absorbed by the Fed is exactly offset by the opposite risk at the Treasury. So it's a phony issue aimed at scaring people away from QE.

It's the rest of Krugman's post that has me scratching my head. Almost the entire post is devoted to criticizing our enemies. How does it reflect poorly on market monetarism if the people that disagree with us have goofy views? Yes, Congressional conservatives have not bought into 4.5% NGDP targeting, but they would be even more opposed to Krugman's call for a 4% inflation target. So what's the point? I'm not even trying to convince Congressional conservatives, I'm trying to convince influential people like Michael Woodford, Christy Romer, Jeffrey Frankel, Jan Hatzius and Paul Krugman. Oh wait, the first 4 are now on board with NGDP targeting, and even Krugman said a few nice things about the idea.

Right now Congress plays no role in the policymaking process. They've given the Fed its dual mandate, and they aren't about to change that mandate, just as they aren't about to do fiscal policy. Our only hope is to convince the Fed that targeting real growth plus inflation is more consistent with the dual mandate than simply targeting inflation. The Fed tends to do what a consensus of economists think they should do. That's why they screwed up in 2008.

The Fed is a cautious and conservative institution, and that's probably a good thing. That means we must change the profession before we change the Fed. If we ever reach a point where most macroeconomists support NGDP targeting, the world's central banks will follow.

Market monetarists are (for the most part) neither Democrats nor Republicans. We see two problems out there, conservatives who favor overly tight monetary policies, and liberals (like Obama) who ignore monetary policy and focus on ineffective fiscal stimulus. Given how most of us are obscure academics at small institutions, I'm actually amazed at the reception we've gotten from both sides of the spectrum. Over the past 5 years I've met many dozens of people who have become sold on NGDP level targeting. I don't know the exact breakdown, but I'd guess it's roughly half and half, liberal and conservative. What other school of thought can make that claim?

Yes, the GOP is in favor of tight money right now, but just wait until they retake the presidency. They weren't complaining about inflation under Bush, when it was higher than under Obama. Ideas percolate upward from the intellectuals to the policymakers. I've been invited to give talks to most of the top think tanks on the right, in the US, Britain, and Australia. There is lots of interest in market monetarist ideas on the right. I don't expect to change the mind of well-established academics like Meltzer and Taylor, my goal is to generate interest in NGDP targeting with the next generation of bright young economists, people like Evan Soltas and Yichuan Wang.

Given that NGDP targeting is one of the few ideas that havesubstantial support on both the left and the right, I expect it to eventually win out at the Fed. A few regional Fed presidents have already said good things about the idea.

But again, I'm totally confused by Krugman's post. If failure to convince hard right GOP politicians and economists is the sign of a failed intellectual movement, why aren't Krugman's ideas even more discredited? Obviously Krugman's ideas are not discredited, they are influential in certain circles. But so are market monetarist ideas. So what's the point?

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COMMENTS (19 to date)
johnleemk writes:
Over the past 5 years I've met many dozens of people who have become sold on NGDP level targeting. I don't know the exact breakdown, but I'd guess it's roughly half and half, liberal and conservative. What other school of thought can make that claim?
This is obviously outside the scope of monetary policy, but perhaps open borders?
foosion writes:

The Fed seems the one part of our government amenable to good arguments, as opposed to the political branches. Support from Krugman should certainly help.

BTW, what do you think of the argument that the govt should work to lower the value of the dollar, leading to a lower trade deficit and higher demand and employment at home?

Unlearningecon writes:

One of the key mechanisms you emphasise is expectations created by CB credibility. Surely this would not exist in Australia, where the CB has not committed to NGDPLT? So how can you determine that the Australian CB is "closest" to NGDPLT?

Scott Sumner writes:

Johnleemk, Yes, outside stabilization policy you can find examples.

foosion, Depends what you mean by "the government." If you mean using monetary stimulus, it's not likely to reduce the trade deficit. If you mean using fiscal austerity to weaken the dollar, I'm fine with that policy.

Unlearningecon, I meant closest in outcome. My point was that if you have a policy that produces stable NGDP growth at a reasonably high rate, (intended or unintended) it's likely to result in a small CB balance sheet.

Michael Byrnes writes:

"Given that NGDP targeting is one of the few ideas that havesubstantial support on both the left and the right, I expect it to eventually win out at the Fed. A few regional Fed presidents have already said good things about the idea."

That's one view (I hope the correct view).

On the other hand, Professor Bernanke said that inflation and NGDP growth were the best indicators of the stance of monetary policy, but Chairman Bernanke said that monetary policy was highly accomodative despite low inflation and anemic NGDP growth.

In late 2008 Chairman Bernanke's Fed was very involved in trying to bail out bad institutions while sitting on its monetary policy hands.

Fed Governor Mishkin presciently warned the Fed about what was going on, then he left the board and toned down the claim in his book that monetary policy could be highly effective at the ZLB.

Christy Romer endorsed NGDPLT... after she left the government. As CEA chair she endorsed big fiscal stimulus.

I think that as long as there is bipartisan political opposition (each party opposing for its own reasons) NGDPLT doesn't stand a chance. Lots of other things economists tend to agree on (taxing consumption vs income) are politically DOA.

bill writes:

Maybe the way to get Krugman to support NGDP targeting is to say that we support his 4% inflation goal whenever RGDP is 1%. And we support a 5% inflation goal when RGDP is growing at 0%. Etc. That is, reorder the RGDP + inflation = NGDP to Inflation = NGDP minus RGDP

And his support for the LT part of NGDPLT is that turns it into a commitment to use his stupid phrasing "to be irresponsible" or something like that. Because really all we need right now is a commitment for the Fed to expand QE (not taper) exponentially until the price level (even better, NGDP level) is back to trend from 2000 to 2007.

Australia's CB boilerplate doesn't do anything to suggest that they aren't looking at NGDP;

In Australia, recent data indicate somewhat firmer growth around the turn of the year, but this resulted mainly from very strong increases in resource exports as new capacity came on stream; smaller increases in such exports are likely in coming quarters. Moderate growth has been occurring in consumer demand. A strong expansion in housing construction is now under way. At the same time, resources sector investment spending is starting to decline significantly. Signs of improvement in investment intentions in some other sectors are emerging, but these plans remain tentative as firms wait for more evidence of improved conditions before committing to significant expansion. Public spending is scheduled to be subdued. Overall, the Bank still expects growth to be a little below trend over the year ahead.

Interesting that they aren't afraid to mention the benefits of moderate growth in wages, too;
There has been some improvement in indicators for the labour market in recent months, but it will probably be some time yet before unemployment declines consistently. Growth in wages has declined noticeably. If these and other domestic costs remain contained, inflation should remain consistent with the target over the next one to two years, even with lower levels of the exchange rate.

True, they pay lipservice to interest rates;
Monetary policy remains accommodative. Interest rates are very low and for some borrowers have edged lower over recent months.

But they don't seem worried about that.
Looking ahead, continued accommodative monetary policy should provide support to demand and help growth to strengthen over time. Inflation is expected to be consistent with the 2–3 per cent target over the next two years.
In the Board's judgement, monetary policy is appropriately configured to foster sustainable growth in demand and inflation outcomes consistent with the target

Scott Freelander writes:


I agree completely with this post, which is why Krugman should be ignored. I know he won't be, and many economists read him, because he's perhaps the widest read economist in the world, but I'd like it if economists let the non-economists read him and move on with a focus on people who actually matter in economics.

John Thacker writes:
But again, I'm totally confused by Krugman's post. If failure to convince hard right GOP politicians and economists is the sign of a failed intellectual movement, why aren't Krugman's ideas even more discredited?

Is your point here that even with a Democratic President and a Democratic majority (filibuster proof in the Senate) in Congress, the fiscal stimulus was "too small" by Krugman's lights, thus "proving" by his measure that he's incapable of convincing the Democratic Party coalition of his views? After all, by comparison George W. Bush appointed Ben Bernanke, arguably putting him closer to you than Obama's stimulus was to Krugman. (And for that matter, Obama had made statements skeptical of QE and monetary policy.)

Unfortunately, I think that Krugman's column is best understood as an attempt to shore up his preferred party coalition, and discourage people from associating with the other party coalition; economics is secondary.

J.V. Dubois writes:

To be honest lately I find quality of Krugman's post really lacking. His defense of fiscal stimulus grows to be quite extreme, consider this quote from recent article:

"He’s right that it’s more or less insane to argue that the economy must be kept persistently depressed for fear that investors will be too exuberant — and at the same time to argue against fiscal expansion or anything else that might offset rising rates."

Really? If there is something insane it is a suggestion that we should use fiscal stimulus to offset monetary tightening.

Patrick R. Sullivan: Scott does not say that Australia uses NGDP level targeting. Scott argues that there is any tradeoff between having more expansionary monetary policy and "taking risks"

What I found more perplexing is the "inflation expectations" part of the sentence. I rally wonder - let's assume just for a moment that "conventional" monetary policy is out of ammo and we are considering fiscal stimulus. Does Krugman actually think that fiscal stimulus may work without increasing inflation expectations? Or did he by "inflation expectations" mean "inflation target"? I do not know. Krugman is less and less coherent for me.

Jason Smith writes:

Hi Scott,

Regarding Australia, it appears monetarism works there because the base is small:

Australia, Australia, Australia, Australia, we love you!

much like Canada or the US in the 1970s:

Output and price level behavior across several economies

Larry writes:

PK is trying not to lose control of the debate. If MM rises, he gets no credit. The monetary offset idea is the most threatening, because it obsoletes fiscal policy, his pride and joy. Until he's gone, as with other aging economists and their ideas, MM will struggle. In that, he is no better than Cochrane, Taylor and Meltzer, sadly, for such a brilliant guy.

MFFA writes:

You can already feel the sweet taste of victory when the great Paul Krugman can only come up with such a clumsy critique of market monetarism

Mike writes:

Larry: eyeroll

Scott: I think Krugman's intentions are clearer if you read the article he linked to. There's a bunch of people saying that reform conservatives have all these good ideas and NGDPLT is getting lumped in there. His point is even if it were an example of a good new conservative idea, the party proper is too crazy for it. I don't think he's saying you're crazy. He's saying that people who see your ideas as a sign that soon we'll have a sane republican party brimming with good ideas are crazy.

Brian writes:

If we are targeting inflation it means we think we can measure it. If we can measure it and NGDP is easy to measure, then why don't we just target real GDP? You probably explained this somewhere before but I can't remember the answer. Please.

Benjamin Cole writes:

Excellent blogging. The Dallas Fed has report out that QE "preserves" price stability. I something on Marcus blog.

byomtov writes:

I don't think Krugman's post was intended to offer a critique of market monetarism. After all, he plainly says,
"We can hash this out later."

Rather, he is claiming that as part of conservative "reform" agenda it is a dead letter, because conservatives will never accept the idea.

I think he is criticizing the conservative notion that government has no part to play in macroeconomic doings, no matter what.

liberty writes:

Not sure how relevant people here will consider this, but it might be worth noting that there have been quite massive (for Australia) protest marches against Austerity in Australia recently - i.e. not everyone favours the government's policies, perhaps not everyone feels the NGDP growth..? How should (or should?) economists include social opinion & unrest in their considerations -- not their calculations, but their considerations -- regarding policy?

liberty writes:

I'd also be curious about the author's thoughts on Sweden's monetary policy and inflation (apparently under 2% ?) having just read something in the economist about it...

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