28
Oct
2011
A Video Trying to Make Nominal GDP Targeting the New Normal
This is pretty good, and has the endorsement of lots of market monetarists (see the comments here).
If I were going to make a video to introduce a newcomer to Scott Sumner’s ideas, it would look something like this.
One question: Why?
EXACTLY! It reminds me of the MMT focus on the mechanism without bothering to justify its necessity. I must confess, I only made it through the first half of the video. This format doesn’t do much for the material. I’d much prefer to just read the transcript.
So far, NGDP targeting just seems like an excuse to print.
“Why?”
Slow, steady growth in nominal expenditures on output is the least bad environment for microeconomic coordination.
The needed changes in prices and wages when the flow of nominal expenditures shift to a higher or lower growth path are difficult to accomplish and signal nothng useful.
It is better that when the real demand for some good increases, the flow of moeny expenditures increases on it, and decreases in the flow of money expenditures only occur when the real demand decreases.
Situations where real demand increases, but the flow of expenditures on a good decreases, but just by less on other goods, create microeconoimc discoordination.
Changes in intertemporal demand are best coordinated by changes in nominal intereset rates. Like in other situations, the demand for some goods rise and the demand for other goods fall. This is true even if the saving occurs through increased money holdings. And a shift to holding wealth in the form of money relative to other assets does not reflect a change in intertemporal demand. Instead, it is just a shift in the term structure, ideally reflected in changes in the interest rates on money relative to other interest rates. Still, for output, the result should at most be an increase in demand for goods and reduced demand for other goods, best signalled by an increase in the flow of money expenditures on those goods with increased real demand.
There are many shifts in supply where resources are being shifted from one area to another, so there is a reduction in the supply of some things matched by an increase in the supply of other things. These adjustments are best made in an environment of slow, steady growth in expenditure on output. But more troubling are shifts in supply that are not balanced in that fashion. A bad harvest reduces the supply of wheat, rather than wheat farmers deciding they would rather plant corn than wheat. When there is a shfit in supply, for example from wheat to corn, the price of wheat rises and the price of corn falls. But with the bad harvest, the price of wheat rises. If anything, substitution would cause the price of corn to rise as well.
The least bad environment to adjust to that kind of change remains slow, steady growth in money expenditures, even though the result is higher prices of wheat, not offset by lower prices of anything else. It would be possible to contract the quantity of money, cause spending to fall thruoghout the economy, have the price of wheat drop a bit (though not back to its initial level,) have the prices of every other good and service fall a bit too, so that the effects are broadly similar to what happens when there is a shift in supply or demand (the supply of some goods fall and others rise as suppliers reallocate resoruces, or the demand for some goods fall and others rise, as consumers reallocate expenditure.) Such a policy or monetary institution would be disruptive.
Bill,
I am sure there is some insight and justification in there, but I’m having trouble picking it out:
> The needed changes in prices and wages when the flow of nominal expenditures shift to a higher or lower growth path are difficult to accomplish and signal nothng useful.
Eh? When does the flow of nominal expenditures shift to a higher or lower growth path? Every quarter? What makes the needed the changes in prices and wages difficult to accomplish, and why do they signal nothing useful? It’s hard to agree with any of this, as written.
> It is better that when the real demand for some good increases, the flow of moeny expenditures increases on it, and decreases in the flow of money expenditures only occur when the real demand decreases.
OK, but how is his not a mere restatement of the laws of supply and demand?
> Changes in intertemporal demand are best coordinated by changes in nominal intereset rates.
Why not real interest rates?
> Still, for output, the result should at most be an increase in demand for goods and reduced demand for other goods, best signalled by an increase in the flow of money expenditures on those goods with increased real demand.
The result of a shift to saving money should be an increase in demand for goods and reduced demand for other goods? Seems like a non sequitur to me, and what are the increases and decreases in goods and other goods supposed to illustrate here?
ahahahahah
“Why?”, c’mon, Joseph, WHY are you asking this? It was a great joke. Jokes aren’t to be explained. Thank you, Bob.
> Slow, steady growth in nominal expenditures on output is the least bad environment for microeconomic coordination.
Why is this? Is this justifiable in micro-economic terms? Or do you need some kind of “nominal liquidity preference” assumption to justify it?
Maybe you can explain what you think is “wrong” with the current micro-economic coordination. For example, suppose Alice has 100 apples and she wants money for them. Once she has money, she will buy oranges. Bob has 100 oranges and he wants money, too. When he gets money, he’ll buy apples.
Do you think the state can “improve coordination” because it can act as a liquidating entrepreneur? For example, the state can come in, buy the apples and oranges and then sell them to their respective buyers. It provides the money “funding” for the transition to a Pareto superior state.
Is this what you think is going on?
It seems that in this scenario, if the state is really behaving like a savvy entrepreneur with funding, it should be able to _remove_ money from the system. That is, it should be able to make net profit from the trades if they’re really making everyone “better off.”
At the very least, it should be able to “sell at cost” and improve coordination without increasing the total supply of money in the system.
Or do you think there’s some other reason why the economy “needs” net money?
I guess they didn’t have much budget. Never mind, in 2 years time when Scott is running the fed I’m sure they can do a remake with Brad Pitt and Cameron Diaz in the leads
Why is it that every xtranormal video I see has the female asking the questions and the male providing the answers?
For what it’s worth, Bob has been doing his part to reverse this alarmingly sexist trend…
http://www.youtube.com/watch?v=6cFXRFlvE3s
The problem with this proposal is that “business spending” doesn’t help the economy if input prices are rising too. I think a big reason for the unemployment right now is that margins are getting squeezed – commodity prices are rising way faster than consumer prices, so businesses are pressured to cut back on labor.
MyFirstNameIsPaul–
Good question. In my case, when I selected the setup, the default was the woman first, the man second, and I had scripted it so that the first line was a question to which the second was an answer, and so on. Admittedly didn’t give the matter much thought beyond that. But if I make any more in the future I’ll keep that in mind.