26 Apr 2012

Brad DeLong: We Have Always Been at War With Sluggish NGDP Growth

DeLong, Economics, Federal Reserve 42 Comments

Brad DeLong in his latest blog post is aghast at Ben Bernanke’s recent remarks on why the Fed isn’t doing more. Don’t worry about what Bernanke said; the interesting part is when DeLong, in exasperation after quoting Bernanke’s can’t-do attitude, says this:

Target the path of nominal GDP, people!

You know, I thought that this would work out very differently. I thought 3 1/2 years ago that the Federal Reserve would announce:

* that this was an emergency situation.
* that its task was to stabilize the growth rate of nominal GDP.
*that as long as nominal GDP was below its pre-2008 trend, the Federal Reserve was going to buy bonds for cash–and keep buying bonds for cash until forecasts of nominal GDP were back on track.

Now when I first read that, it struck me as complete BS. When I first encountered Scott Sumner’s writings around (I think) late 2008, I had to think through what nominal GDP was. Just about nobody thought in terms of NGDP at the time. I’m not saying Brad DeLong didn’t know what NGDP was, but what I’m saying is, he most certainly wasn’t expecting the Fed to announce that it was going to implement what we now recognize as the Scott Sumner Plan for Debasement Recovery.

Incidentally, the reason I was pretty sure of my recollection is that I can remember starting to pay more attention to Scott as DeLong and Krugman came around to his views. In other words, I didn’t think there was much need to deal with the Crazy Guy from Bentley when he was just getting the bi-weekly link from Tyler Cowen, but when more and more people starting saying, “You know, level targeting of NGDP might make a lot of sense,” that’s when I realized, “Scott Sumner must be stopped. No matter the cost.”

Anyway, for those of you who would like some more evidence besides my sincere assurances, here is a Brad DeLong post from January 2009. This is right at the time that he says in the quote above, that he was expecting the Fed to matter-of-factly announce that it was targeting NGDP growth. Look at what DeLong from 3 and 1/2 years ago actually was saying. He first quotes Gary Becker, who had been questioning the need for a big Obama stimulus package when people weren’t expecting the recession to be worse than the 1982 one, and then DeLong explains in his patented patronizing pattern:

The difference between now and 1982 was that back in 1982 the interest rate on Treasury bills was 13.68%–there was a lotof room for the Federal Reserve to cut interest rates and so reduce unemployment via monetary policy. Today the interest rate on Treasury bills is 0.03%–there is no room for the Federal Reserve to cut interest rates, and so monetary policy is reduced to untried “quantitative easing” experiments.

The fact that monetary policy has shot its bolt and has no more room for action is what has driven a lot of people like me who think that monetary policy is a much better stabilization policy tool to endorse the Obama fiscal boost plan.

The fact that Gary Becker does not know that monetary policy has shot its bolt makes me think that the state of economics at the University of Chicago is worse than I expected–but I already knew that, or rather I had thought I already knew that.

I knew Brad DeLong from 3 and 1/2 years ago. He was a blogger of mine. And Brad DeLong, you were no advocate of level NGDP targeting, nor did you think the Fed was.

42 Responses to “Brad DeLong: We Have Always Been at War With Sluggish NGDP Growth”

  1. Yosef says:

    Wasn’t DeLong originally opposed to Scott Sumner and his view? I am pretty sure he got a few “Department of Huh?!”‘s from him.

    I recall Sumner once proudly commenting that he has a printout of of DeLong calling him insane on display in his office.

  2. RPLong says:

    I half-expect DeLong to delete the post you quote here, but your mileage with the quality of his discourse may vary…

  3. Jonathan M.F. Catalán says:

    At the same time, though, DeLong endorsed Krugman’s monetary prescription for economies marred in liquidity traps (aka Japan): high inflation to change inflationary expectations (a la Hawtrey). That isn’t explicit NGDP targeting (more like interest rate targeting), but the differences seem to me to be marginal.

    For all I know, Bob is probably right. But, I think sometimes DeLong says things without really meaning them. He is a heavy proponent of fiscal policy, and he thinks that fiscal policy ought to go hand-in-hand with monetary policy. He was trying to sell the idea that fiscal policy ought to be our main tool, because traditional monetary tools have been exhausted (by the zero-bound).

    • Major_Freedom says:

      I was thinking that too, but then I asked how in the world can DeLong think that monetary policy is ineffective at the zero bound, such that fiscal spending is needed, while at the same time think that monetary policy can still be used at the zero bound to increase inflation and thus spending?

      Either monetary policy can be used at the zero bound to generate desired “spending” outcomes, or it can’t. DeLong seems to be saying both, depending on when it suits his desire for more fiscal spending.

      DeLong wasn’t calling for Sumnerian NGDP targeting back in 2008. If he really were, then he would have said what Sumner always says: Even at the zero bound, the Fed can still inflate the money supply and bring about whatever nominal demand they want, such that fiscal spending does not have to be any last ditch effort due to any empty ammo box of monetarism.

      If DeLong were a true “Fed should have targeted NGDP” fan, back in 2008, then he wouldn’t have said monetary policy is ineffective in 2008 and he wouldn’t have called for fiscal spending in 2008.

      I think Murphy is right. DeLong is clearly trying to rewrite his own history. I bet you he’s going to engage in some heavy hermeneutic interpretation of his past comments in the coming years, so that he can then, in a pseudo-hipster fashion, say he was always a fan of NGDP targeting, that he “knew at the time” that the Fed wouldn’t go along with “unconventional” inflation, and that the fed would be all hawkish and refuse to inflate to cater to the “Serious people”, so DeLong prudently and pragmatically “at the time” argued not that monetary policy itself is ineffective (even though he did say that, but forget about it!), but that the people in control were ineffective, and that because of idiot Fed economists refusing to inflate more, the only solution at the time was fiscal spending to get NGDP back up, since, you know, that’s what Keynesians like DeLong have been saying all along. I mean it’s in all their textbooks and their articles and their speeches. They’ve been Sumnerites all along!

  4. jjoxman says:

    “I knew Brad DeLong from 3 and 1/2 years ago. He was a blogger of mine. And Brad DeLong, you were no advocate of level NGDP targeting, nor did you think the Fed was.”

    Is this the Benson line about Kennedy? “You, sir, are no Jack Kennedy.”

  5. Daniel Kuehn says:

    Sorry to just link and run, but I’ve got some thoughts on this here: http://www.factsandotherstubbornthings.blogspot.com/2012/04/keynesians-on-ngdp-growth-paths.html

    Policies and policy goals are two different things. DeLong has always been with Sumner on policy and on goals. I think he’s been better than Sumner at distinguishing between the two.

  6. flow5 says:

    The economy started falling off a cliff in August 2008 & didn’t bottom until March that year. Delong was late in recognizing the big picture.

  7. Anonymous2 says:

    Has DeKrugman ever admitted they were wrong about something, other than “gee, I thought people were more serious about stimulating the economy. I guess I was wrong.”

  8. Anonymous2 says:

    Bob, what do you think of the free-market monetary equilibrium theorists, such as the free banking theorists. Have you ever written on that? Seems to me they are close to Sumner’s position.

    • Jonathan M.F. Catalán says:

      Just a side-note: free banking and monetary disequilibrium theory is not the same thing, even if a lot of free bankers hold that monetary equilibrium theory is right. I am a free banker, yet I reject monetary disequilibrium theory.

    • jjoxman says:

      Anon2,

      George Selgin is both a free banker and, I think, sympathetic to MET. Prof. Selgin wrote ‘Less than Zero’ back in ’97, in which he makes the case for a productivity norm in inflation targeting.

      Here’s an interview with Prof. Selgin: http://www.soundmoneyproject.org/?p=7368

      And he blogs at http://www.freebanking.org.

  9. Dave says:

    brilliant post, Prof. Murphy!

  10. Anonymous2 says:

    Do you think that a free banking system would have fractional reserve banks that increase money supply when the demand for money increases? If so, is that a bad thing?

    • Anonymous2 says:

      That was meant as a reply to Jonathan.

    • Jonathan M.F. Catalán says:

      Yes,* but this isn’t the same thing as monetary disequilibrium theory. Monetary disequilibrium theory suggests that an “unmet” rise in demand for money will lead to macroeconomic disturbances.

      * It’s not a universal ‘yes.’ The demand for money tends to rise as a result of the unveiling of malinvestment, but I don’t think a free banking system will respond to it by increasing the supply of fiduciary media — largely because it wouldn’t be able to.

      • Major_Freedom says:

        The demand for money tends to rise as a result of the unveiling of malinvestment, but I don’t think a free banking system will respond to it by increasing the supply of fiduciary media — largely because it wouldn’t be able to.

        Bingo. This is a point that market monetarists fail to grasp. When they say the banks will just create more money to suit a higher demand for money, it is as if they view banks as altruistic agencies who will just expand loans when people want more cash. No, banks will only lend if they expect to earn interest. In a period where people desire to increase cash balances, i.e. purchasing power, the only “endogenous” method that can do this is falling prices.

        • Beefcake the Mighty says:

          “In a period where people desire to increase cash balances, i.e. purchasing power, the only “endogenous” method that can do this is falling prices.”

          Err, no permanent changes to the structure of production are needed?

          Monetary neutrality, anyone?

          And before JFC can chime in about “cherry picking quotes” as in our last debate: fuck off.

          • Major_Freedom says:

            There is no permanency to the structure of production, so I have no idea what the significance of that comment is supposed to be.

            Money is not neutral, and it is precisely non-neutrality that I assumed in my statements.

            You should not swear on this blog. Murphy doesn’t swear. Ever hear the saying “You ought not get more drunk than the host of the party?” You’re spoiling it in my judgment.

            • Jonathan M.F. Catalán says:

              MF,

              He’s not here to have a real argument with you.

            • Beefcake the Mighty says:

              Do you believe that changes in the demand for money will have no permanent or long-term effects on the structure of production?

              • Major_Freedom says:

                Do you believe that changes in the demand for money will have no permanent or long-term effects on the structure of production?

                It depends on what exactly experiences the reduction in spending and in what proportion.

                If the demand for money rises by way of a net reduction in investment spending relative to consumption spending, then the long term result will be a “shortening” of the structure of production.

                If the demand for money rises by way of a net reduction in consumer spending relative to investment spending, then the long term result will be a “lengthening” of the structure of production.

                If the demand for money rises by way of a reduction in both consumption and investment spending that leaves the original ratio unchanged, then the long term result will be an unchanged structure of production.

              • Beefcake the Mighty says:

                Thank you, MF, for very clearly stating in your last paragraph a point I’ve been trying, unsuccessfully, to emphasize to certain Austrians: the notion of long-term neutrality is quite prevalent in much Austrian thought, if only implicitly (although you directly affirm it here, thank you again).

                The post-Keynesians have a valid point that the Austrians are, to a large degree, just as confused on this issue as the neoclassicists.

              • Major_Freedom says:

                I’d be careful on making clear what is meant by “neutrality of money.”

                Different schools interpret it differently.

                Some schools interpret “neutrality of money” to mean that aggregate prices adjust in all the same proportions when the demand for money changes.

                Some schools interpret it to mean that real production is totally unaffected, and in this interpretation, there is unaffected in the short term and unaffected in the long term.

                Which Austrians are you talking about that don’t understand what I said? It’s pretty standard Austrian theory.

              • Beefcake the Mighty says:

                I’m referring to the long-term sense, and in exactly the sense in which you state here: long-term effect is for relative prices to remain unchanged. How can you speak of an unchanged structure of production in any other sense.

                And you’re right: too many (not all, I stress) Austrians believe this, and they’re wrong. The ME theory of the free bankers implicitly accepts long-term neutrality.

              • Major_Freedom says:

                I’m referring to the long-term sense, and in exactly the sense in which you state here: long-term effect is for relative prices to remain unchanged. How can you speak of an unchanged structure of production in any other sense.

                OK, just make sure you’re clear about that, because some folks define neutrality of money to mean inflation does not affect the real economy.

                And you’re right: too many (not all, I stress) Austrians believe this, and they’re wrong.

                Which Austrians are you referring to?

              • Beefcake the Mighty says:

                Well, I’m thinking of the free bankers in particular, Horwitz, Selgin (although Selgin doesn’t really think of himself as an Austrian anymore, so I’m not sure he counts) etc. But you can find strands of this kind of thinking (more broadly, the classical dichotomy between “real” and “monetary” economies, with relative prices supposedly set in the former and absolute prices in the latter; this is flawed, there is only one economy, encompassing both money and other goods, it doesn’t require separate spheres of analysis) in much Austrian thought, eg the socialist calculation debate.

              • Beefcake the Mighty says:
            • Beefcake the Mighty says:

              My last comment was directed @MF.

            • Beefcake the Mighty says:

              BTW, MF, when it comes to parties I generally violate Keith Richard’s maxim that one should never turn blue in the host’s bathroom. (Still, it’s worth noting that the Stones suck donkey dick, they’ll never be as good as GWAR!)

        • Anonymous2 says:

          Why would it require an assumption of altruism? As I understand, if people increase their demand for money, banks can lend more money and earn interest with less chance of requiring reserves for redemption. Unless you assume there is just no one out there willing to borrow.

          • Major_Freedom says:

            I assume altruism because it would be impossible for banks to expand loans in a market that is incurring widespread losses.

  11. Jim says:

    What I do not understand is if you are going to be a Keynesian, why you do not naturally become a monetarist. At least then you would be a purist.

  12. Uncle Sam says:

    I wish I was smarter about all of this stuff. Is there somewhere I can get a good overview of the different schools of thought and their ideas about money? Austrians, Keynsians, neo-classical, neo-Keynsian, MMT, whatever. . .

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