More Frank Talk From DeLong on NGDP Targeting
You know, I’ve had my differences with Brad DeLong–and I really can’t stand his habit of editing people’s comments–but he’s actually a straight shooter. Robert Waldmann had asked the entirely reasonable question, “Jan Hatsius (and Brad DeLong) argue that the Fed should declare its intention of buying whatever quantity it takes of long-term Treasuries to achieve a nominal GDP target. But what if there is no such quantity?”
DeLong’s response is breathtaking (as is just about everything coming from the big-guns pushing nominal GDP targeting):
The government can buy more than Treasuries. After Treasuries, you buy GSE debt. And if that doesn’t work, you buy bank and corporate debt. And if that doesn’t work, you lend JPMorganChase $30 billion on the security of Jamie Dimon’s dog. And if that doesn’t work, you buy equities. And if that doesn’t work, you buy the services of construction workers–by which time you are explicitly doing money printing-financed fiscal policy.
Whoa! Do y’all like the part about giving $30 billion to JP Morgan? Sorta puts Goldman Sachs’ recent endorsement of the approach in a new light.
But now for DeLong’s refreshing candor. He admits:
The thing that scares me is that I am not at all sure what or how much the Fed would have to buy. If you had asked me back at the start of 2008 how much the Fed would have to buy in order to keep nominal GDP on its pre-2008 growth trend, I would have said that it was almost certain that the Fed could do it by expanding its balance sheet from $1 trillion to $1.5 trillion. And if you had asked me in the middle of 2008, I would have said that it was almost certain that the Fed could do it by expanding its balance sheet to $2 trillion. And if you has asked me at the end of 209, I would have said that it was almost certain that the Fed could do it by expanding its balance sheet to $3 trillion. Yet here we are with a Fed with a $3 trillion balance sheet…
This is what has frustrated me so much, about the people who are saying, “Oh man, the Fed did it again. They didn’t inflate enough back in the early 1930s, and they’re doing the same mistake this time around.”
Like DeLong is admitting here, I think if you asked 100 economists in 2007 what “shock and awe” would look like, in order for the Fed to show it wasn’t going to let the economy collapse like it (ostensibly) did in the early 1930s, then 99 of them would say a mere doubling of the Fed’s balance sheet would have been overkill. And yet, the Fed has done more than that.
I understand that the market monetarists (that’s the name they’ve settled on) are arguing that done properly, NGDP targeting back in 2008 wouldn’t have required such a big expansion of the monetary base. Yet if that’s true, why do the market monetarists persist in calling the Fed’s actions thus far “contractionary” and “too tight”? They should say something like “misguided” or “inefficient,” but not “contractionary” and “tight.”
If there’s a small kitchen fire in a house, and the fire department sends 50 pumper trucks that completely flood the next door neighbor’s house, I wouldn’t call for more liquidity. I wouldn’t say that the fire department had instituted a needlessly arid policy. Instead, I’d say they were pumping way the heck too much water, and instead they should have chosen a different target.
(Note that in this analogy, DeLong would say, “Keep pumping water at any structure in the neighborhood. Eventually you’re bound to put out that kitchen fire, even if it’s because you flood the whole town with 8 feet of water.”)
I understand the frustration, as I’m not sure how the MM’ers answer it other than saying the Fed needs to have a credible target. But on the other hand, don’t you think that the Fed has the ability to increase nominal GDP if it wanted to? (I’m not sure how big the effect of paying interest on reserves is, but maybe that’s one offsetting factor.) After all, it is capable of debasing the currency. Whether that leads to more real GDP is another issue.
Look, I know you lack the intellectual maturity to avoid falling into ancient religiosity, can’t interpret graphs or do a lick of math, don’t understand the scientific method and probably wouldn’t be bright enough to accept it anyway, but what’s the problem here? What part of the expectations requirement for effective monetary policy don’t you understand?
You’ve supposedly been reading these Keynesians, new Keynesians, and market monetarists for at least 2-3 years, and you still don’t get it?
David S.,
Because DeLong has pinpointed three times where he predicted Fed actions would be adequate, and yet he was woefully, ridonculously wrong, I’m assuming that your comment is addressed to him and not Murphy?
Yes, and DeLong refers to levels of asset purchases rather than levels of NGDP, or even an inflation target, meaning he completely misses the point with those comments. The point is to target an NGDP level that solves the problem, no matter what the size of the monetary base expansion is required. Even basic liquidity trap theory suggests this and this has been the focus of arguments of Krugman and the market monetarists.
David S:
Why don’t you address the Austrian demonstration that your conformist methodology is flawed? Human beings are not projectiles or molecules and do not respond with mathematical certainty to stimuli. You’re so dumb, you don’t even know what the issue is. And we all can see that with your every infantile post.
Don’t you even know that physics studies molecules, particles, etc without pretending to know how each one of them responds to stimuli with certainty?
Fortunately physicists were not Austrian. So we had progress.
Don’t you even know that physics studies molecules, particles, etc without pretending to know how each one of them responds to stimuli with certainty?
The probabilities are presumed certain.
The double slit diffraction pattern is presumed certain.
The locations, sizes and shapes of the equipment used to test various theories, and the researchers themselves, are presumed certain.
Fortunately physicists were not Austrian. So we had progress.
Progress is impossible without certainty of each step.
It’s a good thing not all economists are non-Austrian, or else there would have been no progress at all in economic theory either.
Progress is impossible without certainty of each step.
Now that is bullshit! And I thought Roddis was the master of it.
It’s a good thing not all economists are non-Austrian, or else there would have been no progress at all in economic theory either.
Are you posting from the 19th century?
Now that is bullshit!
Now that is not an argument but just sticking your fingers in your ears!
Are you posting from the 19th century?
I’m posting from after the centuries that falsely believed in mathematical constancies in human action.
Mam, the obvious answer is yes.
I have to agree with your first point, mam. I was always fond of a particular Frank Zappa quote, “without deviation from the norm, progress is not possible”. It is my opinion that not only does progress come about from doing things totally differently from the norm, but that this deviation also requires a certain amount of uncertainty as to what the next step should be. Thus, experimentation.
Yes. The difference is that even though you don’t know (or care about) each molecule, there is statistical regularity in the behavior.
It’s more tricky for people because we can all “know” what the statistical regularities were in the past. We can react with that knowledge today, thereby creating new effect patterns.
Physics would not make much progress if the molecules “knew” about your latest experiments and tried to outwit you. That’s the type of thing that humans do all the time.
As the mathematician Murray Rothbard pointed out, mathematical equations are uniquely suited to depicting a state of mutual determination of factors such as in physics, rather than singly determined cause and effect relations such as human action and behavior.
https://mises.org/daily/3638/A-Note-On-Mathematical-Economics
If you want to debate these issues with a thoughtful counter-argument, go for it. Your infantile name-calling is pathetic.
Few people realize that Murray’s bachelors was in mathematics.
I didn’t realize that, and thank you for sharing. I find myself defending praxeology against neoclassical economists who claim praxeology is just sub-par economics for people who can’t do math.
Not that it necessarily implies anything (its just interesting), Mises brother Richard was a very famous mathematician and physicist.
Also of interest is that Keynes never had a degree in econ, his degree was in mathematics.
As for the claim that Austrians aren’t good at math, our very own Bob Murphy does have a PhD in economics, after all. I’m pretty sure that he is pretty good with math.
I just wanted to add that while I am certainly not an academic (or, even particularly intelligent), I find math to be far easier than economics. For some reason I pick up difficult mathematical concepts far easier than difficult economic concepts. The only difference is that math bores the heck out of me.
1. It seems like single determination is even easier to do in mathematics than mutual determination.
2. Ummm… since when is human action single-determination, Bob? Mutual determination – (we usually tend to call it endogeneity) – is the pre-eminent empirical fact of economics. If anything, I would have thought the reverse is true – that cause and effect is easier to tease out in physics.
3. I’m not sure majoring in math makes Rothbard a mathematician, but now I’m just nitpicking.
> It seems like single determination is even easier to do in mathematics than mutual determination.
Is there such a thing as single determinism in physics? Usually, you have a system where the behavior of each part is “functionally” related to the behavior of each other part. [The word function here is a bit misleading since we usually think of _that_ as inputs determining outputs. In a physical system, there aren’t strictly inputs and outputs except where _we_ draw _our_ boundaries.]
> 2. Ummm… since when is human action single-determination, Bob? Mutual determination – (we usually tend to call it endogeneity) – is the pre-eminent empirical fact of economics. If anything, I would have thought the reverse is true – that cause and effect is easier to tease out in physics.
When an Austrian says human action is not mutual-determination, he does not mean to imply that it is “single-determinism” [still not sure what this means] or that people don’t take other people into account when they act. He means that human action should be studied on teleological [rather than functional] terms. As least the praxeology stuff. We cannot use functional analysis to derive “economic laws.” But it may be useful in the natural sciences. And statistics may be useful for estimating the contents of actors’ ends. I *think* the latter falls in the thymology bucket.
Have I ever said anything that mean to Bob before?
You disdain religion because it is “ancient”, and yet you think maths is a great idea. Presumably you are selective in the mathematics you perform so as to avoid all the old hat, like ohh addition, geometry, logic, etc.
Hmmm, your earlier comments are starting to make more sense in the light of this realization.
Where do you draw the line by the way? Scientology is a relatively recent religion so I’d be guessing you are right into that one.
Bob,
Vincent Reinhart did a good interview with Russ Roberts a while back where he talks about how these Fed programs _really_ work. http://www.econtalk.org/archives/2011/03/vincent_reinhar.html
One thing that struck me was the use of financial engineering in the middle of 2008 to construct new instruments which (1) no market participant would dare buy, but (2) the Fed would happily accept as collateral.
If the Fed ever starts NGDP targeting and they run out of Treasuries, then I think the construction of these types of instruments will become big business. Lots of engineers will pop out of the woodwork to build securities which are overvalued because the Fed is backing them, and we’ll go through something similar to the MBS crisis. Or the Fed could buy all of them. This will just cause an inflation crisis.
Now _this_ won’t be a problem if the government issues enough bonds. They will generate the crappy investments all on their own. No private financial engineering required.
An even better way of expressing what I was trying to get at.
I just wonder how much effort gets expended to produce a truly nominal product under such monetary actions. For example, the government could literally build Giza sized pyramids everywhere in the US, and in such quantities necessary to fill out any nominal GDP target you set beforehand, thus giving you all the Treasuries you would ever need to buy. However, would we call that a good outcome? Well, if you buy something other than Treasuries, such as, perhaps, corporate debt, then why wouldn’t you expect the private sector to behave the exact same way and start producing something no one wants to buy, or even better, to produce debt that actually doesn’t fund any output whatsoever? Isn’t that the missing connection here? The financial incentive to use resources productively is cut out in such policies. I mean, does anyone expect the Fed’s balance sheet to shrink?
Remember that market monetarists judge how tight or loose monetary policy is entirely by reference to if it will bring NGDP to the appropriate target and by this measure they believe that all policy since 2008 has been tight (as well as being misguided – I think Sumner and the others do say that too)
Also market monetarists believe that expectations play a key role in policy and that if the fed would come out clearly and say that they would do everything needed to achieve a 5% NGDP growth target , they would not have to do very much asset buying – the market would do most of the heavy lifting.
I think Sumner’s ideal solution would be a NGDP futures market where the market would do the whole thing with the fed just setting the target and running the futures exchange.
Off topic but Yglesias finally addresses “The Myth of Malinvestment” after calling Tom Woods a crank for two and a half years.
Pitiful. It’s over. We’ve won.
http://thinkprogress.org/yglesias/2011/10/23/350973/the-myth-of-malinvestment/
I don’t have a facebook or whatever, so I can’t comment on MY’s blog. I think his confusion is mainly [how can malinvestments be a problem? at best they are sunk costs!].
Nick Rowe asked the same question over the weekend. Why are we focused on malinvestments [stuff that happened in the past]. Please see my two comments at the bottom. I think they address the underlying issue. The basic idea is that malinvestments are not just part of the Austrian theory of crisis [what happened in the past]. _Avoiding_ malinvestments is also key to the Austrian theory of recovery [what needs to be done now].
Perhaps you can use some of these ideas to analyze MY’s article.
Nick Rowe post.
http://worthwhile.typepad.com/worthwhile_canadian_initi/2011/10/did-god-overinvest-in-land.html
My thoughts on his question:
http://worthwhile.typepad.com/worthwhile_canadian_initi/2011/10/did-god-overinvest-in-land.html?cid=6a00d83451688169e20162fbd70a3c970d#comment-6a00d83451688169e20162fbd70a3c970d
http://worthwhile.typepad.com/worthwhile_canadian_initi/2011/10/did-god-overinvest-in-land.html?cid=6a00d83451688169e2015392820f20970b#comment-6a00d83451688169e2015392820f20970b
Target acquired, drones dispatched.
I’m glad my name is on the Do Not Kill List….
Which is another way of saying that sufficient inflation turns whatever real GDP you do have into your target NGDP simply by shifting prices along a bit. Whacko the chook!
WARNING: As we all know, there’s a time lag between the injection of new money and the visible effect of this on prices. This time lag is not exactly predictable, and may be several years. Thus on a year by year basis, inflation created by NGDP targeting can just just as easily cause the next year or the year after to go out of equilibrium, making is even more difficult to stabilize the system.
Time constants are not to be ignored. The physical world is full of them, thus the economic world must also be.