Monetary Policy: Rules vs. Discretion

      Sumner wrote a post today "Imagine there are no hawks and doves" which again makes the case for a wholly rules based monetary policy. He, as is usually the case, comes up with an inventive way to make the case but I still don't buy it.

     "Sometimes people will ask me what I think of a liberal or conservative being put on the Supreme Court. I usually answer that I don’t care whether the nominee is a communist or fascist or vegetarian or utilitarian, as long as he or she is a good judge. Of course they role their eyes at my naivete. “You’d don’t really think that ideology has no impact on their decisions, do you?” No I don’t, but it shouldn’t. If I were on the court I’d rule Obamacare constitutional, even though I don’t like the bill. And I’d expect the actual justices to be equally unbiased. It’s sad that they are not."

     http://www.themoneyillusion.com/

 

     If that's true then it's sad Sumner isn't on the court. Unless, this is his patented tactic of concern trollng. Krugman gives us a very good working definition of concern trolling:

    "Some readers have asked me for a reaction to Steve Rattner’s piece on Medicare and the Affordable Care Act. The short answer is that it’s a classic piece of concern trolling – the practice, all too common among a certain class of commentators, of professing sympathy with progressive policy goals, then, invariably, finding a way to support right-wing talking points."


    http://diaryofarepublicanhater.blogspot.com/2012/04/sumner-krugman-and-concern-trolling.html

     Sorry, got to be a skeptic. Sure, I keep an open mind but that doesn't mean I close my eyes.

     "Of course a 2% inflation target should eliminate inflation hawks and doves at the Fed, and of course it won’t. That’s because even with the Fed target of 2%, policy is neither accountable nor transparent. The Fed has a dual mandate (not just inflation targeting), and the Fed doesn’t do level targeting. This allows lots of wiggle room for ideological bias."

     "With level targeting, Fed officials would be forced to lay their cards on the table. If a hawk wanted less inflation now, he’d know it came at the expense of more inflation later. And if a dove wanted more inflation now, she’d know that it came at the expense of less inflation later. They’d be forced into choosing the inflation path that resulted in maximum macroeconomic stability, which just happens to be pretty close to NGDP targeting (especially if the trend rate of real growth is stable.)"

     "During 1933 most of the experts on Wall Street railed against FDR’s dollar depreciation program, insisting it wouldn’t work. Meanwhile traders drove stocks higher and higher as dollar depreciation triggered rapid growth in output. In the 1970s high inflation drove stocks lower, even as Keynesian economists peddled their Phillips Curve theories. Since 2008 lower inflation expectations have driven stocks lower, even as old-time monetarists insist there’s an inflationary time bomb waiting to explode. That’s why we need to replace the FOMC with an NGDP futures targeting regime. There are no hawks or doves on Wall Street, no ideologues. Just realists."

        Again, another piece of concern trolling-invoking FDR as a good guy, nice way to get down the guard of the liberals. To be sure,, Sumner always says that FDR "dollar depreciation program" was the best example of good monetary policy in action. There is some controversy about that even to be sure. Skidelsky in his epic three part biography on Keynes insists that FDR's gold buying scheme was actually a failure-Keynes at the time had called it the "gold standard on booze."

      These to be sure are historical questions that are still being debated. Whatever points Sumner wins by praising FDR in this way with liberals also bear in mind that his overall picture of FDR is negative and he believes that the New Deal retarded the recovery-the NIRA,, etc, by jacking up wages.

      The point of Sumner's post is that monetary policy should be rule based. I will grant you he makes a pretty seductive case. I mean that, it does sound good as his whole pitch for NGDP targeting always does. Still, as we have argued in previous posts, Sumner is really a brilliant Trojan Horse. He desires Paul Ryan's fisca austerity but he tries to get there by short circuiting the political process-which he knows is very fraught, Ryan's budget in its current form is DOA-and passing the Ryan budget through the Fed.

    As to specifically his call for rule based monetary policy it is right out of the Monetarist playbook, isn't it? We've been hearing it's virtues extolled for years. Interesting though Bernanke might agree with Sumner on some things, he actually stated in a book in the 90s regarding inflation targeting that all monetary policy is discretionary, that the desire for rule-based policy is a chimera.

    On this I think Bernanke is clearly right. Think about it. The real point of a rule is to hamstring the Fed. What it really means is "even if the city burns down we have our target" and that the people "can cry blood" and we will be unmoved. That's what it effectively means.

     But in an emergency how can you expect to react to events on the ground if your hands are tied. The idea of saying "Never" is not much of a guide to life. And not much for monetary policy to be built on either.