Be right for the right reasons
Richard Williamson has a comment on my earlier post ”NGDP targeting is not a Keynesian business cycle policy”. While Richard agrees on the Market Monetarist call for NGDP targeting he nonetheless disagree with my arguments for NGDP targeting. He is Richard: “That’s from Lars Christensen, in a post arguing that a lot of people (I presume he doesn’t intend to be talking to me, but he might as well be) of a market monetarist persuasion are using Keynesian-type terms when talking about NGDP targeting. Whilst I believe it is technically correct to argue that central bank NGDP targeting would improve ‘macro-stability’, or that we need ‘monetary stimulus’, or that NGDP targeting is conducive to higher long-run real GDP growth, I should probably recognise that a lot of these phrases comes with a whole load of connotations (especially to economists) that I don’t necessarily intend.” I fundamentally do not have problem with using consequentialist arguments like “NGDP targeting would improve macro-stability”. Most Market Monetarists are doing that all the time. However, I am quite sceptical about that the call for “monetary stimulus”. It might be because Richard is not an economist (no offence intend), but to a quasi-reactionary economist like myself when I hear the word “stimulus” I am reminded of discretionary policies. Market Monetarists are arguing strongly against discretionary policies and in favour of rules. The key reason that quantitative easing of monetary policy in the US has not worked better than has been the case is to a very large extent that the Federal Reserve implemented QE without stating what it tried to achieve and hence missed anchoring expectations. Furthermore, if the Fed had been operating a NGDP level target or a price level target then it would not have needed to take nearly as aggressive action in terms of increasing the money base as the Chuck Norris effect probably would have done a lot to stabilise the macroeconomic situation. Said in another way a credible monetary target would have ensured that market forces would have done most of the lifting and therefore the unprecedented increase in the US monetary based would not have been needed. So in conclusion Market Monetarists should be more focused on arguing the case for a monetary policy rule like NGDP level targeting or price level targeting rather than pushing for further QE. Obviously further QE is likely needed if the Federal Reserve would do the right thing and a target a return of NGDP to the pre-crisis trend. In fact from a strategically point of view more QE without a clear monetary policy rule might in fact undermine the public/political support for NGDP level targeting as another round of QE just risks just increasing the money base without really increasing expectations for NGDP growth. This is a key reason why it is so important for me to stress why we are favouring NGDP targeting. We have to be right for the right reasons. Furthermore, again from a strategy perspective I think it would be much easier to win over conservative and libertarian economists and policy makers for the case for NGDP level targeting if is made completely clear that Market Monetarists are in favour restricting central banks’ powers rather than increasing their discretionary powers. Furthermore, it is also key that we make it completely clear that we are certainly not inflationists. In fact I personally think that in an ideal world central banks would targeting NGDP to ensure what George Selgin calls a productivity norm, which in fact would mean moderate (productive driven) deflation. I am well aware it could be pretty counterproductive to argue for deflation right now as must people don’t understand the crucial difference between deflation generated by monetary excessive money demand and deflation as a result of productivity growth. But on the other hand there comes a day when we get out of the present mess and then we want to be able to argue as forcefully as now that monetary policy is overly loose. I would not have liked to be on the wrong side of the debate in the 1970s (I was born in the early 1970s so I did not do much debating on monetary policy then – that only started in the 1980s). Sometime certain arguments can be “convenient”, but in the long-run convenient arguments don’t win the debates. The correct arguments win debates in the long-run. Just ask Milton Friedman. Finally thanks to Richard Williamson for commenting on my post. It is highly appreciated even if I disagree.