I fear that even you, my loyal blog readers, may not fully appreciate just how insightful my earlier post on Scott Sumner was. So let me take the humor out of it and write plainly.
In this post on the Irish “miracle” (of apparently huge economic growth), Scott wrote:
I’ve argued that NGDP targeting is not always appropriate for small open economies, citing examples such as Australia and Kuwait. Actually, it’s probably much more appropriate for Australia than Ireland. The key is whether NGDP tracks total labor compensation fairly closely. Where it does, as in the US, then NGDP targeting is appropriate. Where it doesn’t, as in Kuwait, then you want to target total labor compensation, perhaps per capita.
Look at that part I put in bold. Scott added it as almost a throwaway line, but it underscores that there are all sorts of variants of his framework, and they could (potentially) lead to huge differences in outcomes.
For example, suppose Trump becomes president and then tells Scott he wants him to design the new Fed regime. After quickly deleting all of his anti-Trump blog posts, Scott comes up with a mechanism by which the Fed has zero discretion, and simply buys/sells futures contracts (in a subsidized market) to ensure that the market always expects total labor compensation to grow at 5% per annum, with level targeting. Originally Scott had thought about doing NGDP targeting, but since he was given free rein, he decided to play it safe and go directly for total labor compensation.
Unfortunately, in yet another completely unexpected move, Trump reads the work of Bryan Caplan and decides that the only way he can pay off the national debt in 8 years is to let in 30 millions new workers per year.
Contrary to the warnings of the nativists, it turns out Bryan Caplan is right: Although certain sectors get crushed, on average real wage rates are poised to go up for the average American worker, even if we restrict our attention to the original group (before Trump came in and opened up the floodgates).
However, nobody realizes–until it’s too late–that Bryan Caplan’s cool plan (when considered by itself), plus Scott Sumner’s cool plan (when considered by itself), lead to disaster when they’re combined–using the very same framework that Bryan and Scott employ.
In the first year, with the influx of 30 million new workers, total real labor compensation is poised to jump by (say) 15%. But the new monetary regime limits the total growth in nominal labor compensation to 5%. So that means on average, nominal wage rates need to fall by 10%. [UPDATE: These numbers could work, but it is probably misleading you by me picking 15%, 5%, and 10%. I think this tripped up David Beckworth in the comments below, and he understandably thought I was confused at Step 1. In a follow-up post I’ll pick a clearer numerical example.]
If prices and wage rates were perfectly flexible, this wouldn’t be a big deal. But Bryan Caplan thinks nominal wages are not flexible, and Scott Sumner’s entire case for NGDP targeting rests on the assumption of sticky prices (in particular, sticky nominal debts). For example, someone who just bought a house with a 30-year mortgage is going to be screwed when the new Fed regime, coupled with much more open borders, causes his nominal paycheck to drop 10%. His mortgage payments don’t drop, even though food prices fall 15%.
In conclusion, my point isn’t to warn, “We better hope we don’t get Open Borders plus NGDP targeting in the same year.” Rather, my point is that Scott Sumner’s case is actually much more nuanced than I think some of his biggest fans appreciate. Yes, Sumner himself can be quite nuanced, but I’m curious: For those of you who’ve been reading him for years, did you realize the policy would blow up with rapid population growth? Or that if the Irish economy had implemented it last year, its people would be in a depression right now (according to Scott’s world view)?
One more parting shot: If you’ve ever described Market Monetarism as a policy of “encouraging steady growth in total spending,” does it matter that NGDP is actually a subset of total spending? (GDP is spending on final goods and services, not on intermediate goods.)