David Glasner Makes the Case for NGDP

      Sumner recently made his case and we looked at that.

       http://diaryofarepublicanhater.blogspot.com/2012/04/scott-sumner-on-case-for-ngdp.html

       However, Glasner thinks there is something important to add.

        "As I mentioned, Scott Sumner and Nick Rowe have already provided a bunch of good reasons for preferring targeting the time path of NGDP to targeting either the level (or time path) of the price level or the inflation rate. The point that I want to discuss may have been touched on in their discussions, but I don’t think its implications were fully worked out."

       http://uneasymoney.com/2012/04/29/why-ngdp-targeting/

       What I like about Glasner is that he's very idiosyncratic so while he too is a Market Monetarist he very much has his own spin on many questions and often they make a lot of sense. For example, how many Market Monetarists or Monetarists in general are skeptical of Milton Friedman? Yet he rarely mentions Friedman where there is not an overtone of skepticism. Comparably, Lars Chrsistensen admits that he pretty much thinks every thing Friedman did was great because was Friedman.

       Recently, in fact Lars and Glasner had something of a debate over Friemdan, and specifically the famous "Hot Potato Effect" that Sumner is also very partial to-the idea that during high inflation money is a like a hot potato that no one wants to be the last to hold.

      "David Glasner is a very nice and friendly person, but I have to admit that David always scares me a bit – especially when I disagree with him. For some reason when David is saying something I am inclined to agree with him even if I think he is wrong. There are two areas where David and I see things differently. One the “hot potato” theory of money and two our view of Milton Friedman. I tend to think that the way Nick Rowe - inspired by Leland Yeager – describes the monetary disequilibrium theory make a lot of sense. David disagrees with Nick. Similarly I have an (irrational?) love of Milton Friedman so I tend to think he is right about everything. David on the other hand is much more skeptical about Friedman."


      http://marketmonetarist.com/2012/04/16/glasner-on-friedman-and-schwartz-on-james-tobin/

       Glasner actually wrote a book which was meant to be neither Keynesian or Monetarist but in some way was about Free Banking. Here though is the kind of commentary that I appreciate in him:

        "Last week, David Andolfatto challenged proponents of NGDP targeting to provide the reasons for their belief that targeting NGDP, or to be more precise the time path of NGDP, as opposed to just a particular rate of growth of NGDP, is superior to any alternative nominal target. I am probably the wrong person to offer an explanation (and anyway Scott Sumner and Nick Rowe have already responded, probably more ably than I can), because I am on record (here and here) advocating targeting the average wage level. Moreover, at this stage of my life, I am skeptical that we know enough about the consequence of any particular rule to commit ourselves irrevocably to it come what may. Following rules is a good thing; we all know that. Ask any five-year old. But no rule is perfect, and even though one of the purposes of a rule is to make life more predictable, sometimes following a rule designed for, or relevant to, very different circumstances from those in which we may eventually find ourselves can produce really bad results, making our lives and our interactions with others less, not more, predictable."

        I really like the point about being skeptical of the consequence of any rule. I think that idea is a total misnomer-even with the MMT JG I have some skepticism too. Really a lot of things cause you to be skeptical about the JG as an anchor to aggregate spending and prices-the idea that we can pay JG workers $8 an hour without being indexed to inflation and only when it is agreed to-about once every 5 to 10 years-I'm skeptical about. Then too, are we really going to create a class of workers without union rights? I like the JG-I'd be happy to see the old Works Progress Administration (WPA) back tomorrow, permanently-not just as it was originally under FDR as a temporary emergency measure.

      Back to Glasner, I appreciate his skepticism about rules. I share it-indeed Bernanke argued back in the 90s in a book about inflation targeting that the reality is all monetary policy is discretionary. The only way it couldn't be is if we never ever changed our mind. And really we shouldn't even promise to do something like that. As both an economic and philosophical point that's wrongheaded.

      Here now is the meat of Glasner's argument:
  
      "Let me start by noting that there is a curious gap in contemporary discussions of inflation targeting; which is that despite the apparent rigor of contemporary macro models of the RBC or DSGE variety, supposedly derived from deep microfoundations

     "So, Friedman’s result implies that the optimal rate of inflation ought to fluctuate as the real equilibrium (natural) rate of interest fluctuates, fluctuations to which Friedman devoted little, if any, attention in his essay. But from our perspective there is an even more serious shortcoming with Friedman’s discussion, namely, his assumption of perpetual full employment, so that the real interest rate could be identified with the equilibrium (or natural) rate of interest. Nevertheless, although Friedman seemed content with a steady-state analysis in which a unique equilibrium (natural) real interest rate defined a unique optimal rate of deflation (given a positive equilibrium real interest rate) over time, thereby allowing Friedman to achieve a partial reconciliation between the optimal-inflation analysis and his x-percent rule for steady growth in the money supply (despite the mismatch between his theoretical analysis of the rate of inflation in terms of the monetary base and his x-percent rule in terms of M1 or M2), Friedman’s analysis provided only a starting point for a discussion of optimal inflation targeting over time. But the discussion, to my knowledge, has never taken place. A Taylor rule takes into account some of these considerations, but only in an ad hoc fashion, certainly not in the spirit of the deep microfoundations on which modern macrotheory is supposedly based."

     "In my paper “The Fisher Effect under Deflationary Expectations,” I tried to explain and illustrate why the optimal rate of inflation is very sensitive to the real rate of interest, providing empirical evidence that the financial crisis of 2008 was a manifestation of a pathological situation in which the expected rate of deflation was greater than the real rate of interest, a disequilibrium phenomenon triggering a collapse of asset prices. I showed that, even before asset prices collapsed in the last quarter of 2008, there was an unusual positive correlation between changes in expected inflation and changes in the S&P 500, a correlation that has continued ever since as a result of the persistently negative real interest rates very close to, if not exceeding, expected inflation. In such circumstances, expected rates of inflation (consistently less than 2% even since the start of the “recovery”) have clearly been too low."

     "Targeting nominal GDP, at least in qualitative terms, would adjust the rate of inflation and expected inflation in a manner consistent with the implications of Friedman’s analysis and with my discussion of the Fisher effect. If the monetary authority kept nominal GDP increasing at a 5% annual rate, the rate of inflation would automatically rise in recessions, just when the real interest rate would be falling and the optimal inflation rate rising. And in a recovery, with nominal GDP increasing at a 5% annual rate, the rate of inflation would automatically fall, just when the real rate of interest would be rising and the optimal inflation rate falling. Viewed from this perspective, the presumption now governing contemporary central banking that the rate of inflation should be held forever constant, regardless of underlying economic conditions, seems, well, almost absurd."

     There is a lot to chew in all this. What I take away from this at a minimum is that like Steve Waldman has argued too, NGDP targeting is at a minimum a marked improvement over inflation targeting. What I tend to doubt is the idea of Scott and company that we must leave the target rate the same-forever. Forever is just a very long time.

      Then too, right now it is very much in vogue right now that we have maybe entered a permanent output gap-or as Tyler Cowen thinks The Great Stagnation. Assuming that the output potential of the economy does shift markedly would that suggest the need for a different target? Also no matter that Sumner always says that the exact target isn't that important just that we stick to it I don't believe that.

     To me, Lars is way too low at 2%. What this means implicitly is zero tolerance for inflation. On the other hand a higher target means that during times like this, we are committed to higher inflation to make up the gap. For me, if I did buy the Great Stagnation-I don't, I think it's way too pessimistic and really serves the agenda of both the hawks and the austerity lovers-then that would mean that we should seek a permanently higher level of inflation. If our natural output rate were really 1.5%-again skeptical-then our inflation target should go up to 4 or 5%.

     Glasner at a minimum is right about too much faith in rules and he is right that "the presumption now governing contemporary central banking that the rate of inflation should be held forever constant, regardless of underlying economic conditions, seems, well, almost absurd."