29 Apr 2014

A Post Having Absolutely Nothing to Do With Level Targeting of NGDP Growth

Market Monetarism, Scott Sumner 66 Comments

I have been somewhat astonished by how much Scott Sumner has transformed the economics blogosphere (and even serious academics and policymakers) in favor of his views, which were almost universally considered absurd back in early 2009. It’s not just progressive Keynesians who have come around to his way of thinking, but even many free market fans have said that they used to be Hayekian on business cycles, but were persuaded by Sumner.

My frontal assaults on Sumner do not seem to have resonated with the people on the fence. So let me use completely circumstantial evidence to get you to reevaluate exactly why you find Sumner to be so persuasive.

In a recent post Sumner gives “The case for 80% tax rates on the rich.” He’s not being ironic; that is actually what he does in the post. Some excerpts:

Recall that in recent posts I argued that the baseline assumption should be equal taxes on current and future consumption…In my view the strong presumption of sharply decreasing marginal utility at high levels of consumption means that the baseline tax policy is highly progressive, and to deviate from that assumption conservatives need to make arguments based on second order effects…I don’t really have any idea what the top rate should be, but for extremely high levels of consumption it’s certainly plausible that an 80% rate might be appropriate. I’d support that rate in a deal for a pure consumption tax and abolition of income taxes. A $40 million dollar yacht will motivate a financier just as well as a $200 million yacht, in a world where financiers mostly care about how they are doing relative to other rich guys. And they’d still be able to put expensive paintings on their walls—prices would fall and who else would buy them? But fewer artists will be able to live in Brooklyn or Chelsea.

Of course I still think the top income tax rate should be zero, but high MTRs on ultra-high level consumption are fine.

Think of it as a big Monopoly game. If the developers of Monopoly had required the owner of Boardwalk to share 40% of their profits from Boardwalk with the other players, that would have been just one more rule. Even if the current rules are justified on efficiency grounds (and they are not all justified), that doesn’t make the beneficiaries of the rules “deserving” of their good fortune. Trump could have just as easily been born as a one-armed beggar on the streets of Dhaka. Progressive taxes are just one more arbitrary rule in the game of life, like 20 year patent protection for some inventions but not others, or get-out-of-jail free cards for people that can’t pay back millions in debt.

Yes, let’s have progressive taxes, but do it sensibly and don’t exaggerate the problem. That’s all.

If you ever convince me that I’m wrong about “deserve,” I won’t conclude that Donald Trump or Donald Sterling deserve their money. Rather I’d tax it and give it to that more deserving mom. Indeed I’d take most of the money we spend on welfare and move it overseas.
[Bold added.]

Incidentally, he links “Donald Sterling” to the stuff about the phone calls with his mistress; it’s not a link to an article explaining why Donald Sterling used illegitimate means to obtain his wealth. So, Scott Sumner has one-upped Al Sharpton: So far as I know, Sharpton just thinks Sterling’s comments mean he should be forced to sell his property. Sumner thinks “we” can just take it from him. I mean, why should a racist get to keep so much wealth? How does that maximize utility?

Now you might say, “Give me a break Murphy, you’re just sore because Sumner has crushed your views on money and banking so decisively.” And it’s true. I confess, I am having trouble grappling with someone who has seduced so many of my colleagues by blaming our current woes on the “tightest monetary policy since the Herbert Hoover Administration” when the data look like this:

P.S. Since I have no doubt opened up Pandora’s Box with the Sterling remarks, I might as well get these two links out now: Here’s Kareem on the situation, and here’s a hilarious article on the fact that in 2014 Sterling was to receive his second lifetime achievement award from the NAACP. Awwwwkward.

66 Responses to “A Post Having Absolutely Nothing to Do With Level Targeting of NGDP Growth”

  1. Andrew' says:

    I don’t find Sumner convincing at all, which is probably why I haven’t read enough of him to be convinced. When I comment on his blog things like “FASB 107’s credible commitment to relaxation occured on the day of the stock market bottom” he responds “meaningless because of EMH.” I find all his claims to be question begging. Just sayin’. That isn’t to say economics doesn’t deal with alternatives…I don’t find many explanations convincing.

  2. Mike M says:

    “Yes, let’s have progressive taxes, but do it sensibly and don’t exaggerate the problem. That’s all.”

    Progressives don’t really believe in equal protection under the law.

    • Keshav Srinivasan says:

      “Progressives don’t really believe in equal protection under the law.” What makes you say that? Most progressives at least profess to believe that similarly situated individuals should be treated the same. Are they insincere in that claim?

      • Bob Murphy says:

        Keshav do you really not even see what Mike M is getting at?

        Suppose *the actual statutes* said you get 10 years for armed robbery if you make $100,000 or less, but you get 1 year prison if you make $100,000+. Don’t you think progressives would go nuts not merely because they disagree with the specific policy, but also because it violated equal treatment under the law?

        • Keshav Srinivasan says:

          Yes, they would cry foul on equal protection grounds, because two people who are similarly situated in terms of what they did and how they violated the law are being treated differently in how the law deals with them on the basis of an unrelated characteristic. But I don’t see the analogy with progressive taxation: in that case the law isn’t meting out legal remedies for a transgression of the law, but rather collecting money to fund the government. So it has nothing to do with equal protection of the laws.

          Now you could have a case like a tax on practicing Judaism, for instance, where the remedies for violating the law treat similarly situated individuals the same, so you don’t have equal protection issues, but progressives would still oppose it on other grounds, like infringement of religious liberty.

          • Mike M says:

            OK I see it is not readily apparent to you.
            The principal is that all persons are treated under the law. Unless you want an Animal Farm situation whereby some pigs are more equal than others.
            A progressive tax scheme violates that principal. A high income earner has his income (property) disproportionally taxed than a low income earner. It is not equal application of tax law.
            I fail to see why that is such a difficult concept to comprehend. Bob was trying to make the analogy to criminal law tht we don’t sentence people on a preformatted scale based on income. Similarly, if we are going to be principled, we don’t tax property (incomes) differently based on levels and pretend we believe in Equal Protection.

  3. Major_Freedom says:

    Underneath a relentless tidal wave of state coercion, free market arguments get drowned and frustration from the weak minded more easily turns into apathy and borderline Helsinki Syndrome* psychology.

    *A state of dysfunctional thinking, where crimes and malevolence fall to inattentional blindness for those who wish peace and the achievement of imaginary civility/humanity to bolster poorly founded ideals and rose colored eye wear use, invented by self-proclaimed intellectual/philosophical aspirants vainly trying to justify their careers. This leads to recognition proffered to despotic and incompetent leaders and lures group thinking into a passive herd mentality, like caribou, while predators continue to stalk their periphery and they surrender their lead to shepherds who have their own appetites, dogmas and dissertation to feed.

    Sumner is more a symptom than a driver. He, like socialists before him, has given a few fence sitters a smorgasbord of disconnected and often contradictory one liners, all based on a self-professed anti-rationalist philosophy of Rortyism, and has provided them with an excuse not to have to jump to the fringe free market side, where it is often difficult to stand up against the onslaught of statist propaganda.

    If it were easy to be right, then the world would be a free market. But it’s easy to be wrong, so…

    • Tel says:

      Yeah, the stuff is quite disconnected, I’m all for pragmatism but you have to at the very least maintain self-constency.

      I think there’s a relevant point to be made with Intellectual Property law, but you get better results from starting with a principle – private property serves the purpose of solving the tradgedy of the commons.

      With computer algorithms there never, ever has been evidence that a tradgedy of the commons ever existed. The pragmatic approach (based on understanding the economic purpose of property law) is to remove IP laws until you see some tangible signs that there’s a real problem.

      • Keshav Srinivasan says:

        What about the economic argument that IP laws foster innovation, because if people are given an exclusive monopoly over the ideas they come up with, then they’ll have a greater incentive to come up with ideas that benefit the rest of the world, so that the exclusive monopoly that they’ll get over the idea will be really profitable to them?

        • Keshav Srinivasan says:

          It’s similar to the argument that you should give people control over land (or other natural resources) that they homestead, because then they’ll have an incentive to make the land as valuable to the world as possible, so that their control over it will become really valuable to them.

          • Tel says:

            It is a similar argument.

            However intellectual property is not land.

        • guest says:

          … if people are given an exclusive monopoly over the ideas they come up with, then they’ll have a greater incentive to come up with ideas that benefit the rest of the world …

          The implication, there, is that the rest of the world somehow deserves the innovations that come from others.

        • Ken P says:

          Perhaps. Or perhaps the number of potential patent infringements a small startup potentially faces in producing any new product inhibits most from entering the arena. You can’t hardly move a mouse without infringing on a patent these days.

          Large IT companies buy up crappy companies all the time just to increase their patent warchest and thereby decrease the odds of being sued.

        • Tel says:

          But we saw huge amounts of software innovation in the early days when neither copyright law, nor patent law actually covered software.

          There never was a shortage of innovation, nor is there now.

  4. MichaelT says:

    As far as I understand the Sterling situation, NBA teams are like McDonald’s franchises, so what people are proposing is that the NBA owners revoke his franchise (which I believe takes a 3/4 vote), which would in effect leave him with no other option than to sell the team. If he did violate the terms of the ownership agreement (which I don’t know much about), I don’t see anything here that violates libertarian principles of property rights. You might argue that it sets a slippery precedent for punishing owners/employees for unpopular opinions, but I don’t think it violates the NAP.

    • Matt M (Dude Where's My Freedom) says:

      I’d be quite interested to see whether the ownership agreement includes a clause dictating what language you can and cannot use in private conversations in your own home with individuals you know personally and have no connection to your NBA franchise.

      I mean if it’s there, then yeah, this is not an NAP issue. But somehow I doubt it is…

      My guess is that there’s likely a more generic “you can be punished for any actions which are detrimental to the NBA” and they’re insisting his private conversation, recorded without his knowledge or consent, is such an action.

      • Mike T says:

        Matt M –

        “My guess is that there’s likely a more generic “you can be punished for any actions which are detrimental to the NBA”

        >> Yes, I believe there’s a section (35?) that deals with misconduct that covers player behavior. Now, they could extend that to managers or owners which I presume was used to justify the fine and suspension. However, the bylaws defining conditions where the Board could terminate a franchisee (ie forced sale) are more restrictive to things like gambling, team finances. This is what I’ve gathered from people floating around sections of the bylaws on the internet. They’re private but I would bet more will be made public as this story unfolds. While the fine and suspension isn’t surprising, if the Commissioner decides that the Board should vote on forcing a sale, that would seem to be a more dubious action. Regardless, the guy has reached a point of no return anyway. I can’t imagine he’ll be the owner of the Clips for much longer, no matter how it unfolds.

  5. Jonathan says:

    While I prefer your views on Libertarian ethics, I’ve come to prefer his views (and Keynes views) on money. After years of reading Rothbard, he just seems inconsistent on deflation. If inflation causes economic miscalculation then so should deflation. But he seems to brush it off as simply a correction of the previous inflation. See LK’s blog on this. I like Hayek’s “secondary deflation”. The concept of monetary disequilibrium seem very helpful even if it’s only a pedagogy. While I might prefer that the central bank doesn’t exist if it’s going to be in charge I would hope it takes on the least bad policy. Stabilizing nominal spending just seems to make sense.

    I might be wrong, as I only read this stuff after I’ve put my kid to bed, but this is where my stance is now after hearing all of these arguments and reading a lot of books. Maybe I’m a sample of your lay readers. I feel like I’m a classical liberal Keynesian even though that is probably a big contradiction. The debate between you and David was a big moment, NGDP targeting was another big thing for me, I’ve found LK’s blog very insightful, as well as Sumner’s blog and others, Nick Rowe, David Glasner, Daniel Kuehn. Even though some of these people disagree in many ways it’s very interesting.

    I guess I don’t know what story is the best one to describe all situations but I’ve really enjoyed this subject called economics!

    • guest says:

      If inflation causes economic miscalculation then so should deflation.

      When we talk about monetary inflation causing miscalculation, it’s because the monetary inflation in the case of paper money is fraudulent.

      When monetary inflation happens under sound money, the first spenders of the new money get more wealth than later spenders – just like under paper money – but in this case it’s not fraudulent.

      The reason is because the marginal utility of the commodity has, in actual fact, gone down. The more units of a good you have, the less urgent are the preferences for which you will use an extra unit (i.e., the value of the next unit goes down, for you).

      Under paper money, the marginal utility of those things which the paper represents (remember that sound money is a good, itself) have not gone down, but people are misled into acting as if they have by the artificially increased supply of money.

      Monetary deflation of paper money is a correction down until the paper is backed 100% by that which it claims to represent. Deflation further than that is theft.

      Monetary deflation of sound money is theft.

      Does this help?

      • guest says:

        Monetary deflation of sound money is theft.

        *Unless it is deflated because it is now being used as a commodity; In which case the marginal utility of that commodity money has, in fact, risen.

        • Jonathan says:

          “When we talk about monetary inflation causing miscalculation, it’s because the monetary inflation in the case of paper money is fraudulent.
          When monetary inflation happens under sound money, the first spenders of the new money get more wealth than later spenders – just like under paper money – but in this case it’s not fraudulent.”

          I get the case between the fraudulent and non fraudulent stuff. To be more specific, I understood the economic miscalculation to occur as entrepreneurs confused the lowering of interest rates as a sign that consumers had chosen to save for future consumption. Eventually, the entrepreneur realizes that they don’t have the resources they need at the price they expected. It sounds like a supply shock story. In which case, if supply has dropped then prices should probably be higher.

          I can also see how inflation causes a distortion in relative prices. If prices go up, but would have otherwise gone down.

          The gold standard sounds like a rules based productivity norm. If we are not going to switch over to the gold standard over time, then why not NGDP targeting in the meantime?

          I can also see how the liquidity premium story fits in with marginal utility. And how savings might not always equal investment.

          Instead of entrepreneurial miscalculation, I prefer the debt deflation story because I think it comes down to good vs bad monetary policy. (I don’t fully understand it and just tried to summarize it in a single sentence!) I swear I saw an interview with Hayek claiming later in life that his capital theory really applied during the gold standard and may not apply in all situations. I think Garrison has said things along these lines as well. I could be wrong. I would hate to quote someone inaccurately. Please correct me if I am wrong.

          • guest says:

            Some disclosures before I respond:

            I haven’t read much on NGDP, but what little I have read (from Mises.org) leads me to believe that the problem with it is that it’s an aggregate, which is meaningless for economic calculation.

            (I can quote from an article, if you think it would help.)

            I haven’t read much Hayek or Garrison.

            My responses:

            It sounds like a supply shock story.

            Well, it’s what the Keynesians would call a supply shock, so yes, as far as they’re concerned.

            But ask yourself what it would look like to produce too much of something – keeping in mind that the goal of production is to supply final goods to consumers. Wouldn’t there be a “supply shock” in some area, if production unnecessarily went up in some other area?

            That’s the Austrian analysis: that while paper money gooses “output”, it’s a waste (or at least inefficient, if you prefer, since a lot of times capital can still be sold, but at a loss) – it doesn’t serve the interests of consumers, which is the whole point of production.

            Instead of entrepreneurial miscalculation, I prefer the debt deflation story because I think it comes down to good vs bad monetary policy.

            Does your analysis include the presumption that the function of money is to facilitate valuations between the goods that are bought and sold with it?

            Because that’s where we start.

            So, in our view, if you misrepresent the value of the money, then you’re causing economic miscalculation.

    • Andrew' says:

      Keep in mind, Sumner’s thing is that no one in the field of economics (or policy, let alone the general public) supported his views until recently.

      So, this is a bit like comparing Babe Ruth to “The Helicopter” legend from the NYC playground basketball circuit.

      • Jonathan says:

        I think he has said that his views were the accept norm until 2008 or 2009 and that now some were coming back around to it.

        In your opinion who would be the Babe Ruth?

  6. khodge says:

    Many years ago the public school superintendent said that the the municipality and the taxpayers had plenty of room for more taxes. While this was probably quite correct from a supply side perspective, it never really addresses the question: “Why does government have a right to take whatever economic models say the taxpayers can afford” or, more precisely, if the model says the optimal level of taxation is (for example) 45% does the model explain that it is the government’s right to actually take that money?

  7. andrew' says:

    If being racist these days is banging Mexican african Americans and not caring if your girlfriend bangs huge HIV positive black men as long as it is in private then cliven Bundy certainly isn’t racist.

    I’ve noticed something about racism and market monetarism. Public debates don’t seem to be about the issues. Remember, Scott’s argument is that his was the mainstream view until the entire profession went crazy for a minute. To now flock to his views in a breathless panic says something about the field.

    • Bob Murphy says:

      andrew’ wrote:

      If being racist these days is banging Mexican african Americans and not caring if your girlfriend bangs huge HIV positive black men…

      Incidentally, I briefly toyed with the idea of going on Twitter and saying something like, “Maybe Sterling doesn’t want AIDS and was being sensitive to gay community.” But I decided few people would find that funny.

      • Yancey Ward says:

        We wouldn’t want you to get banned by all the karaoke bars.

  8. Jonathan Finegold says:

    Sumner’s argument where you excerpt sounds very Rawlsian.

    What do you think about one of the other arguments he makes? That given diminishing returns, at some point we can “safely” say that a poor person will gain more utility from a wealthy person’s last dollar than that wealthy person. I can see the logic, but the argument still seems weak. Is the impossibility of interpersonal utility comparisons a strong defense against this? Or, how would you respond?

    • MichaelT says:

      I think the inherent flaw in that argument is that most of the time people are talking about the utility of the rich person and poor person individually, without considering that a wealthy person’s billionth dollar is actually tied up in some investment, and the loss to the economy when that must be liquidated never seems to be added in to the utilitarian equation. I’m no utilitarian, but it is a weak argument even if you concede utilitarianism.

      • Keshav Srinivasan says:

        Well, Sumner is a proposing a progressive consumption tax, so it’s about the billionth dollar that goes into actual consumption. Now you could say that taxing away that billionth dollar will decrease the rich person’s incentives to save and invest, but part of Sumner’s argument is that rich person places so little value on that billionth dollar of consumption that you’ll hardly affect his incentives at all.

        • MichaelT says:

          But even if he places no value on the billionth dollar of consumption, the consumption tax would have to come from money he would have otherwise invested, which would reduce the amount of capital in the economy. Every dollar that is redistributed to the needy is a dollar that would have otherwise been invested. It still may result in a hypothetical utilitarian calculation that overall utility is increased when wealth is redistributed, but people who push this line of argumentation usually only include the difference in utility between the billionth dollar of consumption by daddy warbucks and the utility of the dollar being transferred to a poor person. But, they never add in the utility of that dollar remaining invested in capital instead of being consumed.

  9. Tel says:

    Some of this sounds a bit like Robert H Frank, some of it basic envy politics with the race angle thrown in for added divisiveness. In terms of whether we are knifing the top 5% or knifing the top 1% or now we seem to be going after the top 0.1% at least Sumner can read statistics, which puts him ahead of Krugman.

    Going into the issue of who “deserves” what, that’s what our whole system of laws is supposed to be figuring out. Trying to correct for this with wealth transfer is a way of saying that really all those laws are a waste of time because they don’t work… leading to the conclusion we shouldn’t bother.

  10. Morgan Warstler says:

    The point is it is better to trade a higher number to get everyone to focus on progressive consumption taxes.

    The only real way to do it is via upfront cash payments, so the tax rate is the same for everyone.

    Which gets you Guaranteed Income / Choose Your Boss, which any self respecting Libertarian must love:


    Libertarians that don’t focus first on reducing the actual number of public employees, and the overall compensation paid to them via technology, first and foremost are weak tea drinkers.

  11. tesc says:

    Dr.Murphy, I think is clear that when Sumner says tight policy, he means low average NGDP since 2008. He has said it many times. NGDP is the lowest since Hoover. By paying interest rates on reserves they lower velocity so the money would say as an interest bearing asset in the FED rather than in circulation.

    That should be obvious by now. The base is irrelevant if it is not use. NGDP is the only one that will tell you if they have been expansionary. In historic terms, FED has not been with NGDP below average. Even at negative rate of money growth we could have expansionary policy if velocity was super high and the FED would have to contract even more.

    “one cannot accurately gauge the easiness of monetary policy by looking at money-stock measures alone.

    Instead, one must look at measures that indicate the relationship between the stock of money on one hand and the real demand for it or, if one prefers, its velocity.

    What matters isn’t how rapidly the money stock grows, regardless of how one chooses to measure it, but whether its grows faster than the public’s demand for real (that is, price-level-adjusted) money holdings.

    Even a low, a zero, or a negative absolute growth rate for some money-stock measure can prove excessive if demand for the monetary assets in question is declining. Regarded in light of this consideration, Greenspan’s monetary policy was in fact “easy,” as I will endeavor to show.” http://mises.org/daily/3200

    Even at hyper positive growth rate of money base we can have contractionary policy if velocity is very low. Like you guys can see below. The graph makes also the point.

    Frequency: Quarterly
    observation_date M1V
    2007-01-01 10.411
    2007-04-01 10.498
    2007-07-01 10.607
    2007-10-01 10.679
    2008-01-01 10.613
    2008-04-01 10.626
    2008-07-01 10.382
    2008-10-01 9.501
    2009-01-01 9.122
    2009-04-01 8.816
    2009-07-01 8.651
    2009-10-01 8.643
    2010-01-01 8.654
    2010-04-01 8.695
    2010-07-01 8.613
    2010-10-01 8.394
    2011-01-01 8.141
    2011-04-01 8.012
    2011-07-01 7.494
    2011-10-01 7.346
    2012-01-01 7.247
    2012-04-01 7.157
    2012-07-01 6.958
    2012-10-01 6.776
    2013-01-01 6.690
    2013-04-01 6.600
    2013-07-01 6.585
    2013-10-01 6.501


    • andrew' says:

      Read that first sentence 10 times. See what I mean with my first comment?

  12. Keshav Srinivasan says:

    “So far as I know, Sharpton just thinks Sterling’s comments mean he should be forced to sell his property. Sumner thinks “we” can just take it from him. I mean, why should a racist get to keep so much wealth? How does that maximize utility?” Bob, that’s not what Sumner is saying at all. He’s saying that we shouldn’t design rules like the tax code based on what people “deserve” in a moral sense (i.e. that the government shouldn’t legislate morality, to recall a discussion we had on this blog). But he’s saying that if someone ever convinced him that the government SHOULD design the tax code on what people deserve morally, then he would take away Donald Sterling’s money, because he believes that racists don’t deserve to be rich.

    Surely you agree, don’t you, that you can be a libertarian, even an anarchist, while still believing that bad people shouldn’t prosper, while not supporting the government trying to rectify that immoral situation through taxation

    • Bob Murphy says:

      Keshav, OK I see what you’re saying. I did *slightly* misunderstand his argument, but what he *is* saying is pretty bad still (from a standard libertarian perspective).

      • Keshav Srinivasan says:

        Why is what he’s saying in that quote bad from a libertarian perspective? Why can’t a libertarian say to Donald Sterling, “You’re a despicable human being and you deserve to lose everything you have, but you have a right to your property so I’m not going to tax you for being a bad person.”? Or do you not see a distinction between what you have a right to and what you deserve morally?

    • andrew' says:

      Because people are wrong about sterling.

      All the deciders are simply covering their assets now that they are compelled to do so. They didn’t act prior. They WERE wrong if they are now right. Except they are also wrong now.

      Part of respecting property is accepting central planners are always wrong. Not sometimes wrong. Always wrong.

      And this message is just from a utilitarian perspective. Point being, we don’t have to go any further than utilitarian.

  13. Edward says:

    Bob Murphy,

    Your chart is meaningless, if you accept, for the purposes of argument, that the definition of tight money is slow ngdp growth. Scott specifically says that the monetary base is an unreliable indicator. I f you disagree, than your quarrel is basically a difference in definitions, but don’t post that chart as if its the end of it. It isn’t

    Incidentally, the idea of NGDp growth as a goal makes much more sense to me. If we study hyperinflations, we find strong correlations between the velocity of money (NGDP growth) We find a huge monetary base as well, but we also find cases like Japan and the US. in the Great Depression and recession with large increases in the base, and falling CPI. In those cases. The correlation between falling CPI and low NGDP still holds. So therefore, NGDP is a more “useful” real world indicator.

    • RPLong says:

      if you accept, for the purposes of argument, that the definition of tight money is slow ngdp growth.

      There it is right there. This is why NGDPLT is insane. It is a circular tautology that means nothing. Slow NGDP growth is not just the definition of tight money, it is the definition of a recession. It’s like saying, “The best Fed policy is to counteract recessions.” Yeah, of course. There’s just one little question remaining: HOW???

      “NGDP futures market!”

      Oh, you mean something that doesn’t really exist? And how long until someone comes along and suggests that the newly invented NGDP futures market is predicting an erroneous outcome? For that, we’ll just have to wait until the next major recession, when everyone wonders what went wrong.

      I don’t know man. I’m a nobody. I know nothing. But this NGDPLT stuff is so obviously circular reasoning that I can’t figure out why normally smart people buy into it so completely.

      • Ben J says:

        RP Long,

        I understand your point.

        I would recommend separating the NGDP target from the NGDP futures market idea. You don’t need one to have the other, it’s just that the MMs are committed to the idea of forward-looking market based policy levers.

        If you want a treatment of why people think NGDP targeting is superior to inflation targeting, take a look at Woodford’s 2012 paper, presented at Jackson Hole.

        In it he says (among a whole lot of other stuff) that he thinks the optimal target is something called an “output gap adjusted price level path target”, but that he could see that an NGDPLT target might be good middle ground, certainly better than an inflation target.

        • andrew' says:

          Marginally better…I’ll buy that part.

        • RPLong says:

          If you want a treatment of why people think NGDP targeting is superior to inflation targeting…

          The problem is that I’ve already been down that rabbit hole a few times. Using circular reasoning to argue against inflation targeting is not the same thing as justifying NGDPLT. The best arguments I’ve ever heard for NGDPLT state nothing more than “it’s better than whatever you would rather do. That might be a start to a conversation about why NGDPLT is the way to go, but it’s just a start.

      • JNCU says:

        Negative Rgdp is the definition of a recession. Not slow Ngdp. In the 70’s we had positive Ngdp growth and negative Rgdp during one resseccion. All the Ngdp was inflation.



        3% = 5% + -2%

        Ergo, recession under positive Ngdp. Even a high Ngdp

        6% = 7% + -1%

        Can be under a recession

        • JNCU says:

          I was listening to Sumner in Econtalk and the host ask about this. I think is the 2009 interview. Ngdp is not part of the definition of recession. NGDP just tends to drop during recessions. It just does not have to. Recessions are negative Rgdp.

        • JNCU says:

          But now thinking. My bachelor’s is in math so I guess it is easy to picture than for non math people. I can see the confusion.

          • RPLong says:

            I’m not confused, I’m simplifying to make a point. This is another annoying tactic of NGDPLT aficionados – rather than absorb the point someone else is trying to make, they harp on them for failing to strictly adhere to terminology. Yes, I am aware that the definition of a recession is two consecutive periods of negative growth. You’re missing my point. Belaboring a jargon error on my part does not substantiate NGDPLT.

            • JCNU says:

              Dude I have no horse on this. Definitely not an aficionado. I am theologian that likes libertarian stuff. I hope Christians figure it out that big government is the problem for the Church. Whether Obama or bush are in power.

              I was just correcting your idea that Sumnerism is a tautology. It is not and the numerical example shows it. We have to appropriately describe disenters.

              Hayekians and Austrians can criticize Sumner because his ideas will create mega malinvesnents. You need mega liquityty to jeep 5% Ngdp.

              But it is not a tautology. Which seemed to be your point. If not, what was it.

            • W. Peden says:

              “I’m not confused, I’m simplifying to make a point.”

              Not necessarily a bad thing, except when the simplification results in a distortion that drives your point, like it does in this case.

              That delta-NGDP contracts by 50% does not logically imply that delta-RGDP contracts at all. Yet, since the latter is how market monetarists tend to think of recessions, then it’s simply false to say-

              “Slow NGDP growth is not just the definition of tight money, it is the definition of a recession.”

              – where this is a claim that market monetarists are proclaiming a tautology.

              Similarly, you can get a recession as a result of a supply-side shock, so a fall in RGDP doesn’t imply a fall in NGDP, e.g. the UK was in recession in 1975 even though the growth rate of NGDP accelerated dramatically.

              And now you know that-

              “But this NGDPLT stuff is so obviously circular reasoning that I can’t figure out why normally smart people buy into it so completely.”

              – is false. Of course, that’s not the only conceivable grounds for objecting to the policy, but it’s not one that you can sensibly use now.

      • Mike T says:

        NGDP futures market –> means
        NGDP -> target

        I suppose Mr. Sumner doesn’t care much for Mr. Goodhart.

        Yes, there’s something that doesn’t seem right and oddly circular.

      • andrew' says:

        See what I mean?

        It is the same problem I have with the “aggregate demand because…aggregate demand.”

        • andrew' says:

          It is also the supreme confidence in something that seems to be an untested and perhaps unfalsifiable hypothesis that is a tad off-putting.

          So what happens the first time you crank up ngdplt and rgdp drops further?

          “Well, that wouldn’t happen because…reasons…expectations…etc.”

          • Andrew' says:

            And thank goodness they paid interest on reserves, because who knows what magnitude effect that had, but it is at least something to point to.

          • RPLong says:


            What happens when somebody tries NGDPLT and then observes a recession.

            “Well, er… the futures were wrong!”

            What then, a futures-futures market? And what about this: If expectations were perfectly efficient, then there wouldn’t be recessions anyway!

            “Never reason from a change in expectations!”

            If Bob wants to become a comedy super-star, he should write a ventriloquist routine where the dummy is a proponent of NGDPLT. It would also make for a good episode of his zombie shtick.

    • Mike T says:

      Edward –
      Your chart is meaningless, if you accept, for the purposes of argument, that the definition of tight money is slow ngdp growth. Scott specifically says that the monetary base is an unreliable indicator. I f you disagree, than your quarrel is basically a difference in definitions, but don’t post that chart as if its the end of it. It isn’t

      >> My first reaction is the same — that the difference here is simply one of defining terms. Yet there’s something that still doesn’t sit well with me.

      Suppose Yellen discovered her inner Rothbard, tacked a life-sized poster of Mises on her office wall, and convinced the rest of her colleagues at the Fed to begin raising rates and ending asset purchases.

      Let’s further suppose that after some short-term pain while the market corrects, NGDP growth begins trending back up and hits 5% (~ 4% RDGP , ~ 1% CPI) within a year or two and is sustained for several consecutive quarters thereafter.

      It’s now 2017. Would Sumner proclaim: “See, monetary policy was loose in 2014-2017, you fools! I win! Just look at NGDP!”

      • Tel says:

        Funny you should mention that, here’s a chart of NGDP in the UK (being nominal, the chart is showing the currency of the country in question, and “basic prices” as they call it), you will note that (by Sumner metric) the UK delivered a consistently loose monetary policy for most years except for a brief hiccup around 2009/2010.


        People elsewhere talk about UK “Austerity” which is really just another way of saying “loose monetary policy”.

        I’ll go out the back now, so when my head explodes no one will worry too much about cleaning up the mess.

    • Major_Freedom says:


      The fact that NGDP has been more tightly correlated with the CPI is meaningless, if you accept, for the purposes of BOB’S argument, that the definition of loose money by the Fed is the money the Fed directly controls, i.e. base money.

      If you disagree, then your quarrel is basically a difference of definitions, but don’t post a chart of NGDP as if it’s the end of it. It isn’t.

      Incidentally, the idea of productivity based growth in money supply makes much more sense to me. If we study hyperinflations, we find strong correlations with the money supply. We find a huge NGDP growth as well, but we also find cases like Japan and the US. Before the Great Depression, we find large increases in money supply, despite only gradually growing consumer prices. The lagged correlation between rising money supply and recession still holds. So therefore, money supply is a more “useful” real world indicator.

      By the way, what is more or less “useful” is subjectively determined. It is not, what seem to be insinuating, objectively useful as if everyone has the same goal in mind.

      Auatrians are concerned with the causes of recessions and depressions, not how to treat the symptoms like the market monetarists, who claim that if the symptoms aren’t seen, then the underlying illness is somehow eradicated.

      Money supply is more useful than NGDP because not is money supply a factor of NGDP, but it is also helps avoid the blindspot that MMs have on why we find periods of time where the desires to hold money for longer suddenly arise as a “shock.” Any theory that takes for granted “shocks” as inexplicable, are prone to recommend solutions that may very well be the very cause of the symptoms that MMs observe and claim to be the “cause” for why the economy goes into recession.

      MM theory is like a doctor saying that a person’s high fever, sweating, paleness, and coughing are the causes for why that person is ill, and if onky we dealt with the symptoms, then somehow we can cure the underlying illness.

      MM theorists do not understand that the problem isn’t the wrong money supply or the wrong NGDP. The problem is that money is not free marjet driven, which results in distortions to relative prices, relative interest rates,a and relative spending, which then distort the real economy which is the actual problem.

  14. andrew' says:


    These views of Sumner’s you’ve learned by him trolling his own comments section: what are they, have they helped, and how?!

  15. tesc says:

    “What happens when somebody tries NGDPLT and then observes a recession.”

    Supply shock, like the 70’s, and the FED will not be allowed to expand beyond 5% NGDP like they did in the 70’s


    Year NGDP, CPI
    1970-01-01 5.8 6.1
    1970-04-01 5.8 6.0
    1970-07-01 5.5 5.7
    1970-10-01 4.9 5.6
    1971-01-01 8.0 4.4
    1971-04-01 8.3 4.4
    1971-07-01 8.4 4.1
    1971-10-01 9.4 3.3
    1972-01-01 8.4 3.5
    1972-04-01 9.5 3.0
    1972-07-01 9.6 3.2
    1972-10-01 11.6 3.4
    1973-01-01 11.9 4.8
    1973-04-01 11.6 6.0
    1973-07-01 11.1 7.4
    1973-10-01 11.0 8.9
    1974-01-01 8.3 10.1
    1974-04-01 8.2 10.9
    1974-07-01 8.8 11.9
    1974-10-01 8.4 12.1
    1975-01-01 8.4 10.5
    1975-04-01 8.0 9.2
    1975-07-01 9.6 7.9
    1975-10-01 10.2 7.1
    1976-01-01 12.7 6.1
    1976-04-01 12.1 6.0
    1976-07-01 10.3 5.5
    1976-10-01 9.8 5.0
    1977-01-01 9.2 6.4
    1977-04-01 10.9 6.7
    1977-07-01 12.3 6.4
    1977-10-01 11.9 6.7
    1978-01-01 10.9 6.4
    1978-04-01 13.4 7.4
    1978-07-01 13.0 8.5
    1978-10-01 14.5 9.0
    1979-01-01 14.6 10.3
    1979-04-01 11.1 11.1
    1979-07-01 11.3 11.9
    1979-10-01 10.0 13.3
    1980-01-01 10.5 14.6
    1980-04-01 7.9 14.3
    1980-07-01 7.1 12.8
    1980-10-01 9.6 12.4
    1981-01-01 12.0 10.6
    1981-04-01 13.1 9.7
    1981-07-01 14.0 11.0
    1981-10-01 9.7 8.9
    1982-01-01 4.5 6.9
    1982-04-01 5.2 7.2
    1982-07-01 3.2 4.9
    1982-10-01 3.8 3.8
    1983-01-01 6.3 3.6
    1983-04-01 7.6 2.5
    1983-07-01 9.7 2.8

    In 1970 when the first recession of the decade happend, they inflated to lower unemployment, but they ended up getting ever greater price inflation. Like Hayek predicted.

    We do not want FED to increase the base if NGDP is already 5%. They would be overrunning the capacity of the economy. Inflation was corrected in 82 when NGDP was brought down 4.5. Pretty much what MM wants. Hawks in the 70’s, doves now until NGDP is back to 5% average.

    • W. Peden says:

      Well put. There’s a time and a place for being monetary hawks. Venezuela needs tighter monetary policy; the US does not.

  16. W. Peden says:

    “So let me use completely circumstantial evidence to get you to reevaluate exactly why you find Sumner to be so persuasive.”

    When all else fails, use circumstantial argumentum ad hominem? The logical rigour of Misesians strikes again!

Leave a Reply