NGDP level targeting - the true Free Market alternative
Tyler Cown a couple of days ago put out a comment on "Why doesn’t the right-wing favor looser monetary policy?" Tyler has three answers to his own question: 1. There is a widespread belief that inflation helped cause the initial mess (not to mention centuries of other macroeconomic problems, plus the problems from the 1970s, plus the collapse of Zimbabwe), and that therefore inflation cannot be part of a preferred solution. It feels like a move in the wrong direction, and like an affiliation with ideas that are dangerous. I recall being fourteen years of age, being lectured about Andrew Dickson White’s work on assignats in Revolutionary France, and being bored because I already had heard the story. 2. There is a widespread belief that we have beat a lot of problems by “getting tough” with them. Reagan got tough with the Soviet Union, soon enough we need to get tough with government spending, and perhaps therefore we also need to be “tough on inflation.” The “turning on the spigot” metaphor feels like a move in the wrong direction. Tough guys turn off spigots. 3. There is a widespread belief that central bank discretion always will be abused (by no means is this view totally implausible). “Expansionary” monetary policy feels “more discretionary” than does “tight” monetary policy. Run those two words through your mind: “expansionary,” and “tight.” Which one sounds and feels more like “discretion”? To ask such a question is to answer it. There is a lot of truth in what Tyler is saying. I especially like #2. There seem especially among US conservative and libertarian intellectuals a need to be "tough". The dogma seems to be "no pain, no gain". This obviously is an idiotic position. It seems like the tough guys have forgotten that sometimes there are indeed gains to be made with little or no pain. Just remember what the supply siders like Arthur Laffer taught us - sometimes you can cut tax rates and increase revenues. In fact most market reforms are exactly about that - economists call it a Pareto improvement. Unlike other monetary policy rules NGDP level targeting can actually be shown to ensure Pareto optimality (yes, yes I know it is based on questionable theoretical assumptions...) Even though I like Tyler's explanations to his question I think there is one big problem with his comment and that is his premise that Market Monetarists are advocating "expansionary" monetary policy. We are not - at least I am not and I don't think Scott Sumner is. I have again and again argued that NGDP level targeting is not about "stimulus" and it is certainly not discretionary. Rather NGDP level targeting is about ensuring that monetary policy is "neutral" and does not distort the price system. As I have earlier argued that if the central bank is pursuing a policy of NGDP level targeting then (ideally) relatively prices would be unaffected by monetary policy and hence be equal to what they would have been in a pure barter economy. This is what I have called Selgin's Monetary Credo: “The goal of monetary policy ought to be that of avoiding unnatural fluctuations in output…while refraining from interfering with fluctuations that are “natural.” That means having a single mandate only, where that mandate calls for the central bank to keep spending stable, and then tolerate as optimal, if it does not actually welcome, those changes in P and y that occur despite that stability“ Hence, what we line with George Selgin are arguing is the true Free Market alternative to the present monetary policy in for example the euro zone and the US. Contrary to for example the Taylor rule which anybody who has studied David Eagle or George Selgin would tell you is leading to distortions of relative prices. How can any conservative or libertarian advocate a monetary policy rule which distorts market prices? Furthermore, Scott Sumner, Bill Woolsey and myself have suggested that not only should the central banks target the only non-distortionary policy rule (NGDP level targeting), but the central bank should also leave the implementation of this rule to the market through the use of predictions markets (e.g. NGDP futures). I have not seen conservative economists like John Taylor or Allan Meltzer showing such trust in the free market. (The gold bugs and Rothbard style Austrians do not even want to let the market decide on was level of reserves banks should hold...) Of course there is a position which is even more Free Market and that is of course the Free Banking alternative. However, as I argued the Market Monetarist position and the Free Banking position are fundamentally not in conflict. In fact NGDP targeting could be seen as a privatisation strategy. Free Banking theorists like George Selgin of course understand this, but will John Taylor or Allan Meltzer go along with that idea? I think not... But why do people get confused and think we want monetary stimulus? Well, it is probably partly our own fault because we argue that the present crisis particularly in the US and Europe is due to overly tight monetary policy and as a natural consequence we seem to be favouring "expansionary" monetary policy or "monetary stimulus". However, the point is that we argue that the ECB and Fed failed in 2008 and to a large extent have continued to fail ever since and that they need to undo their mistakes. But we mostly want the central bank to stop distorting relative prices and we would really just like to have a big nice "computer" called The Market to take care of the implementation of monetary policy. That is also what Milton Friedman favoured and what right-winger would be against that? PS I assume that Tyler uses the term "right-winger" to mean somebody who is in favour of free markets. That is at least how I here use the term.