Consulting by RPM || Free Advice Blog

Scott Sumner Writes My Hatchet Job For Me

Prodded by an exchange (which I can’t find right now…) in the comments with Silas Barta, I sent the following email to Scott Sumner:

Hi Scott,

I am thinking of doing a Mises Daily article explaining what would actually happen if you were made Fed chairman. Obviously I don’t think we would get out of the recession. So I want to walk step by step through what you *think* would happen, and what would *actually* happen. Then, for bonus points, I would show how you would accommodate the new data in your model, without realizing that you were nuts all along. : )

For an analogy, if I had done it with Keynesians, I would have said in December 2008, “They will go ahead and borrow and spend a bunch of money, and then they will be surprised at the low multiplier. That won’t make any sense, so they will say that private demand was falling faster than they had anticipated, and GDP would have fallen that much more had they not intervened.” etc.

So, can you point me to where you are the most specific about the actual implementation of your ideas? I.e. I know I’ve seen you get more specific than just, “They should target NGDP.”

Thanks,
Bob

Scott then answered (re-printed with permission):

Bob,  First of all, I favor NGDP targeting regardless of whether it gets us out of the recession or not, and regardless of whether it produces deflation or hyperinflation.  In fact deflation would be great, as our RGDP would be soaring, and if it produced hyperinflation we’d all starve to death in about 6 months anyway.

But in that case I doubt 5% NGDP growth would be the cause of the mass starvation.  I favor 5% NGDP growth because I think NGDP measures what most people assume the CPI is measuring–nominal instability

My preferred proposal would be to have the Fed peg the price of an NGDP futures contract, and then adjust the monetary base in such a way as to keep the market equilibrium NGDP futures price equal to the policy goal (say 5% NGDP growth.)  So I’d essentially be having the market determine the monetary base.

As far as how I would accommodate new data, I guess if over a period of a few business cycles the economy seemed more unstable than under the previous policy regime, then I would go back to the previous regime.

Scott