Thursday, October 27, 2011

The latest stupidity: NGDP

The latest dumb idea circulating the orthodox economics blogosphere is NGDP targeting. In this scheme, the Fed, instead of saying "inflation is too high" or "employment is too low" instead says "we want NGDP to be x%". After this proclamation, the economy will start growing at the required rate to hit the declared NGDP target.

Magic, no?

So, what will the Fed do if the economy doesn't suddenly start growing? They will buy more and more Government debt, driving the interest rate further and further out the yeild curve to zero.

"But isn't that just quantitative easing?" you ask.

It is.

"Isn't the Fed doing that now?" you ask.

It is.

"So, what's the difference?"

There is none. But if you believe monetary policy is effective, and you live in a world where it clearly isn't being effective, you've got to do something.

In my view, the Fed fully knows that the economy is growing too slowing and unemployment is too high. They've done everything in their arsenal by bringing the Federal Funds rate to zero, and have gone a step beyond by bringing longer term rates down to zero as well. None of it is working, because changing the duration of outstanding Government debt does not solve the problem of an undercapitalized private sector. The economy needs a larger deficit to start growing again, but economists don't understand accounting, and so do not understand sectoral balances etc.

MMT understands this dynamic very well, and need give no quarter to orthodox macroeconomics, just as oxygen need give no quarter to phlogiston.

Ages ago I read some book on the sociology of philosophy, and the big lesson in it was how all the philosphers you read about knew one another, either directly or indirectly, and how ideological movements compete with one another. If your school of thought is ascendent, then you gain fame by forming a (hopefully) ascendent spliter group. If your school is in decline, you build bridges with those who might think a little different to try and build a bigger tent. And if you are on the outside, you should just be a crank and attach the most dominant group around to try and get their attention, and have them give you credibility by engaging.

The NGDP crowd is a splinter group off orthodox macro. MMT are the cranks. They will not win through accomodation.



Blogger JKH said...

Good post.

Frankly, I’m amused by the blogosphere eruption of the NGDP targeting group – because it reminds me so much of the same sort of phenomenon for MMT over the past several years.

The targeters are currently giddy with dreams of influence on public policy. They seem to be turning inward on themselves for moral reinforcement with every passing day.

MMT is correct in emphasizing accounting, and while helpful, it is not the answer in itself - whether you clarify “NFA” or sector balances, or whatever. And to be accurate about it, MMT does not have a monopoly on the prescription for higher deficits. The only real debate is the one between fiscal and monetary policy, whatever the accounting representation of the result. Fiscal policy changes incomes. Monetary policy swaps assets. It should be obvious which one has the more powerful effect.

That said, it remains a disgrace that the economics profession in general is so obtuse to desirability of developing and aligning theory with financial system measurement (i.e. accounting logic).

Your comment below was particularly well written, and deserves highlighting:

11:49 PM  
Blogger NeilW said...

"Monetary policy swaps assets. "

Monetary policy only has an effect via an indirect fiscal channel.

It's like induction charging vs. plugging the thing straight in. It's so much weaker and takes a lot longer.

What NGDP targeting really is is the central bank undertaking a dilute form of fiscal policy by buying assets. But it misses the fairly obvious point that those selling the assets were likely selling anyway or thinking of selling. So at best you have a timing effect.

But they don't seem to take into account what the outbid buyers did instead and how much income they lost because the central bank changed prices.

But I think we'll have to go through all of these variations before we finally get to the direct spending required.

12:18 AM  
Blogger JKH said...


I find the NGDP proposal to be deeply incoherent and unsettling in the following sense. It is one thing to target NGDP. That’s a single idea with its own challenges in terms of justifying it. It is quite another to try and get there through an extraordinarily extreme view on the potential QE requirement that has been bandied about as a conceivable strategy – in the multi-trillions easily. And you get two for the price of one – targeters and QE’ers as one. The advertised, overt targeters are QE’ers by stealth.

And it’s interesting to compare that to what I would guess might be suggestions coming from MMT’ers about desirable increases in the deficit, which might turn out looking relatively conservative when compared to the wildly expansionary monetary plans of the QE’ers. I may be wrong on that regarding MMT, but that’s my guess at least.

12:24 AM  
Blogger NeilW said...


It does have the advantage of getting rid of the government debt and replacing it with reserves - therefore showing that the government debt is pointless in the first place.

The fun starts when they start buying non-government assets - in a world that clearly has insufficient high quality private assets to start with.

Particularly if those assets are effectively derivatives of real goods and services.

1:24 AM  
Blogger JKH said...

Speaking of the delirium of policy influence delusion that has gripped this group, witness:

"I’m tempted to see the following:

Market Monetarists —> Goldman Sachs/Krugman —> Fed agenda"

6:00 AM  
Blogger Ashwin said...

Excellent post - monetarism just gets crazier and crazier. The cutting edge thought in this NGDP debate is that "Words are stronger than actions". Which is exactly what Hank Paulson thought when he hinted at having a bazooka to bail out Freddie/Fannie and how he would never have to use it - and we know how that turned out!

In the current economy, the Fed could buy up the entire stock of outstanding T-bonds and agency MBS and set it to fire and we will get neither inflation nor growth.

7:28 AM  
Blogger winterspeak said...

JKH: Monetarists have it exactly correct in that the path to policy power is through Harvard, not through the Tea Party, OWS, or Congress.

Sumner, keeps the mask from slipping too far by writing "Goldman Sachs/Krugman". It really is just Krugman because he can legitimize concepts for the appropriate interpretive community via his NYTimes column. So, if Sumner has Krugman on board, then I'm not sure the policy influence is a delusion.

The delusion is that they are doing anything different from what is already happening.

On a separate topic, why do you find the QE extremes so concerning?

NEIL: There was an earlier thread on this blog exploring just how constrained the Fed is in what it can buy.

While they can and have stepped over the line into fiscal, as windyanabasis pointed out, they don't have as much freedom to operate as some might think (at least under current circumstances).

10:03 AM  
Blogger NeilW said...

They are constrained at the moment, but if the NGDP crowd get their way that can be altered.

Here in the UK they are already taking about buying up 'securitised' small business loans.

Regrettably I am being serious.

For some reason buying assets is seen as acceptable, but buying goods and services from real people as dangerous.


10:26 AM  
Blogger JKH said...


Krugman himself has had little influence on policy and he is the first to admit it. His pleadings for much more aggressive fiscal policy going back to the start of the crisis were ignored, and he predicted the result correctly. Krugman has great influence on the profession at large, and on public perception of economic issues, because of his readership - but not on policy. The difference is that he is not delusional in this regard. Sumner comes out of nowhere and thinks he’s setting the agenda all of a sudden. It’s laughable. There is no more chance of the Fed adopting NGDP targeting, than there is of Pee-wee Herman becoming the next Fed Chairman.

11:33 AM  
Blogger JKH said...


The MM'ers NGDP targeting brand of QE is utterly reckless. It embraces QE in the untold trillions, open ended, aimed at anything, until something gives. This is a methodologically bankrupt approach to policy formulation and implementation.

I would hope that MMT would be a little more thoughtful than that about its deficit spending objectives and techniques, given comparable reign for policy responsibility.

11:55 AM  
Blogger winterspeak said...


LOL! OK -- you make a good point and it's well taken. I agree, if Paul Krugman was told that he ran the US, he would laugh. I was wrong to focus on him.

But I still think it's fair to say that the framework policy is shaped within it set by the University, not by Congress. This was not always the case, at least not in the US. Being a university professor, once upon a time, was not a particularly noble occupation and very very far from the seat of power.

This is clearly no longer the case. If anyone can show me an inch of daylight between the K-school and the State Department, or between Harvard Law and the Justice Department, I would be very much surprised.

The US is primarily run by Agencies, not by the Executive, and the Agencies primarily are run by academics, or those trained by academics. This is the promise of "scientifically run government". How's that working out?

11:57 AM  
Blogger JKH said...


A Pee-wee Herman production of NGDP Targeting:

12:17 PM  
Anonymous Anonymous said...

In my estimation, the sudden surge in interest in NGDP level targeting is due to a confluence of national political factors, not economic integrity or clear thinking. Democrats are despairing, and at the end of their rope. They are faced with a radical Republican Congress that is determined to trash the economy so they can trash Obama's presidency. They believe Obama is in serious trouble if he goes into the election next fall with an economy that looks anything like the present one. But with absolutely no possibility of any legislation from Congress coming to the rescue, their last hope is that Ben Bernanke might figure out how to do something, anything to create positive movement in a way that might be self-sustaining.

NGDP-level targeting is a shot in the dark. They're at the point where they just want Bernanke to do a rain dance. They hope that if he climbs to the top of a mountain and shouts "NGDP targeting is here!" market participants will get busy buying, investing and hiring. Maybe it's supposed to go like this:


"Yeah, NGDP! Umm ... what's NGDP again?"

"I don't know, but the Fed says its really important! And they know everything!"

"That's good enough for me! I'm going to go buy a a new car and hire ten workers!"

So now Krugman, DeLong and Yglesias are all over this. But the real tell in this business is that if you look right below the surface, you get 10 different and conflicting reasons why NGDP level targeting is the bees knees. Even the MMers tell different stories. It's a fad.

7:26 PM  
Blogger winterspeak said...

JKH: OK, but how is extreme QE (ie. Fed buys all outstanding Treasury debt, so essentially there is no Treasury security left to buy) all that different from the MMT proposal to stop issueing Govt debt and run an overdraft at the Fed?

In both instances, I'm guessing the FFR will be zero (or something) and there will be no way for a private investor to buy a Treasury if they want as none will be on the market.

I'm not saying this to support QE or MMT, just asking how one is less extreme than the other.

10:46 PM  
Blogger JKH said...


I was comparing incremental QE proposed by MM’ers versus incremental deficit spending proposed by MMT’ers – both as policy responses to current economic conditions.

I wasn’t referring to the MMT structural proposal to eliminate bonds. That particular idea is not prerequisite to MMT proposals for additional deficit spending right now.

The MM proposal for QE doesn’t reference the current deficit, even though it buys up part/all the cumulative deficit via QE. Conversely, MMT points to the current deficit as critical, without necessarily abandoning bond issuance in doing so.

But your point is a good one – the MMT structural proposal is quite extreme, considered on its own merits.

And that said, perhaps I’m underestimating just how aggressive MMT would like to be on more deficit spending at this point. I don’t really know.

5:36 AM  
Blogger NeilW said...

You'll all be glad to know that Will Hutton in the UK has joined the party. His column in the Guardian this week mentions NGDP targeting

" For example there is a case for suspending the Bank of England's inflation target and replacing it with a target for the growth of money GDP – say 5% a year, to be reviewed regularly – to which all elements of policy would contribute, but within a disciplined framework"

Some Plan B...

12:16 PM  
Anonymous Anonymous said...

Isn't all this NGDP business just a way of relabeling "flexible inflation targeting"? Since the CB can't do much to control real growth, the NGDP target just means that they adjust the inflation target up and down depending on where growth happens to be?

4:28 PM  
Blogger JKH said...

Dan Kervick,

You mean like this?

5:24 PM  
Anonymous Anonymous said...

Thanks JKH. You're referring to your comment #11, right?

6:11 PM  

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