Ryan Avent considers The wisdom of Scott Sumner. What would the (US) citizens choose if offered three monetary policy alternatives?
BACK in December, Scott Sumner mused:
People form their views of politics and economics when they are young, and are given the reins of power when in their late fifties. Any thoughtful person in the 1930s could have easily predicted what would go wrong in the 1960s. The generation that grew up in the Great Depression would have a single-minded obsession with boosting [aggregate demand] to prevent mass unemployment. They would see everything as a demand issue, and ignore the supply side. Thus the ‘Liberal Hour’ of 1961 turned into the Great Inflation.
Any thoughtful person in the 1970s could have easily predicted the policy mistakes of the 2000s. The generation that came of age during the 1970s would be obsessed with the threat of inflation—seeing it just around the corner whenever there was a spike in the money supply, a dip in interest rates, or a blip in the CPI from commodity prices. The 1970s generation (including me) would overreact until NGDP growth was driven so low that interest rates fell to zero, making conventional monetary policy impotent. The inflation targeting consensus turned into the Great Recession.
The young people today have grown up in a world dominated by two giant bubbles…
Any thoughtful person today can predict that the macroeconomics policy failures of 2040 will be produced by a generation of late middle-aged policymakers obsessed with preventing bubbles.
(…) I suspect that so long as we’re considering hypotheticals Mr Sumner would request that we introduce a third option in which the Fed successfully targeted nominal output, leading to faster growth from 2001 to 2003, slower growth from 2003 to 2006, and a burst of moderate inflation rather than a recession from 2007 on. I feel confident that the typical American would also prefer that to the outcome we actually got. I’m not sure which of the alternative options she’d prefer, though I have my suspicions.
The important point, however, is that this kind of trade-off is not the one thats available in the real world.
Continue reading Ryan Avent and the thoughtful comments. I’ve contributed one comment to the conversation:
Ryan wrote “The important point, however, is that this kind of trade-off is not the one that’s available in the real world.”
I object. A rule-based central bank executing NGDPLT (nominal GDP level targeting) will dampen the big swings. There will still be surprises but the damages done willbe less severe.
fundamentalist wrote “Monetarists think nothing happens in the economy unless the Fed makes it happen.”
My understanding of the market monetarist thinking is more that the Fed can only impact short term nominal output (NGDP). The Fed cannot plot a path for real GDP. To overstate what Sumner would probably say “everything important for future productivity and wealth happens outside monetary policy”. I would say an economy with long term stable NGDP growth is a good garden for investment and innovation.
PS – one of the frequent commenters hedgefundguy signs his remarks “NPWFTL, Regards”. Like many others I’m wondering what?? I finally found his answer – which refers to disabling the default Economist publish-comment everywhere: