On Scott Sumner's Intellectual Background

     As we have observed in previous posts, Sumner's NGDP has arrived in terms of influence at least, as he and his fellow "Market Monetarists" have brought some of the biggest New Keynesians on board. Then there was that internal memo at Goldman Sachs and that vote in the Canadian parliament by the Liberal MP.

    While Bernanke himself hasn't given his blessing yet, he clearly is aware of it. It does sound like a good idea-NGDP, that is nominal GDP targeting-as opposed to real GDP, while I am not an economist I am very interested in it and would say I have a fair amount of knowledge about it for a lay man. And people who I respect who are good economists-the New Keynesians-seem to think it has merit.

     However I just read a piece by Terrence Corocan who if I didn't know any better is offering a word of caution: "We will hear more of NGDP targeting in weeks and months to come. The debate also takes us all deep into the economic swamp, where creepy jargon and grotesque floating arguments and logical traps abound. One observation, though."

     "The idea of targeting nominal GDP has its origins, in part, in the work of some radical free-market economic theories. Prof. Sumner, for example, cites as inspiration economist George Selgin, at the University of Georgia, who wrote a book titled Less Than Zero: The Case for a Falling Price Level in a Growing Economy. The idea is that inflation could be close to zero over the long term, and that the only way to get to zero would be to allow inflation to rise and fall according to productivity changes in the economy. Putting an inflation target at, say, 3%, unnecessarily introduces inflation into the economy. Targeting nominal GDP would avoid injecting inflation into the economy. The best alternative, he said, was Free Banking and the elimination of central banks — which is so very, very far from what Ms. Romer, Goldman Sachs or Mr. Brison are thinking about."

     Not that you should judge a theory solely on who holds it or midwifed it but...   " The debate also takes us all deep into the economic swamp, where creepy jargon and grotesque floating arguments and logical traps abound." See, that's what I mean by "cautionary", the whole optics of this debate taking us deep into the economic swamp does not sound good somehow... 

    Corocran is certainly right that, the influential economic people giving weight to this idea right now could not be further from the idea of Free Banking. Indeed it's hard to know how this NGDP but it seems to be that in the case of Mr. Selgin at least somehow nominal GDP targeting will eventually take us to an economy with very low inflation. In other words while Sumner, et al, have criticized Beranke for his single minded focus on inflation fighting, Selgin-somehow-viewed this idea as being a much better fighter of inflation long term than direct inflation targeting.

    For those who are curious this is Selgin's website http://www.terry.uga.edu/~selgin/econ8620.html

    The book where he lays these arguments down in most detail is "Less Than Zero: The Case for a Falling Price Level in a Growing Economy."