Tom Brown Gives Us Some Scintillating Analysis on MM and MOA

     I think I've finally figured out how to make this young brother shine-I actually don't know how old he is, though he seems to me to be young at hear. The key is by writing about him and kind of calling him a little bit, he's come back hitting on all cylinders. I appreciate all this gray matter he's suddenly putting out here as what I have always wanted for this blog is to give us a place to learn-myself first and foremost. I don't think I'm anywhere near a guy with all the answers. What makes me different perhaps it that I ask questions others don't. This was true of Socrates. While I still think I disagree with Tom on Sumner and MM he writes some stuff in the latest comment streams which certainly are giving me food for thought. First a conversation he had with Greg over GDP, RGDP, and NGDP. 

    I learned something recently from Sadowski: apparently using just plain "GDP" should be read as NGDP (all this time I'd been thinking it meant RGDP). So can I replace all your GDPs with NGDPs (as Sadowski would do?). Remember a rise in NGDP can be due entirely to inflation with no change in RGDP.

    "My understanding of NGDPLT is that if done at the correct rate (5% is often cited), it mitigates the effects of nominal shocks on aggregate demand. Those shocks can cause recessions."

     "It doesn't necessary fix anything else in the economy. Sumner says you'll still have all your old supply side problems including booms and busts, etc. The idea is that NGDPLT is not a cure all, but it can help eliminate some of the unnecessary problems associated with the weirdness of money. I know the story much better from the MM perspective than any other: to an MMist, a recession is caused by an excess demand for the MOA. NGDPLT is supposed to eliminate excess demand for the MOA.|

     http://diaryofarepublicanhater.blogspot.com/2014/02/austrian-and-neoclassical-econ.html?showComment=1392138622884#c1556044252273487946

     This is something that Greg has talked about before that I've always found a little confusing. Greg himself responds to Tom here:

     "If Im reading Sadowski right I agree with him. The whole N or R should just be dropped. All measurements are N, the conversion to R is fraught with all types of problems and at times it muddles rather than helps the analysis. Just follow the numbers whether they are inflation adjusted or not..... but also look at real variables like sales and employment. If sales aren't increasing but GDP is that just means prices are going higher and no more output is being sold, which likely means no more people are being recruited to manage the output."

     I think I may be following the point here, though am not certain. I guess the idea is that when we get the prices of GDP they are by definition nominal prices. Later on we adjust them for inflation and get RGDP and inflation. If that's the argument I get it, though I still am not sure something isn't being left out somehow. Why do we have the term NGDP if GDP is NGDP?

     Tom then goes into a very fluent discussion on MOA. He's talking about a recent post by Nick Rowe. 

      "Hi Greg: I'm not sure that monetary base necessarily = demand, even in an MM universe. The reason I say that is because Nick Rowe recently did a thought experiment about a world in which the CB controls two interest rates: the IOR (which he called Rm) and the FFR (which he called Rb). He pointed out that to a monetarist such as himself, the only thing that's of macro-economic importance here is Rm, because that directly controls the "demand" for the MOA. The CB could set Rb according to some "law" (like a Taylor Rule), or choose not to set it and let it float, or even to outlaw lending altogether (Islamic style) and it wouldn't have any macroeconomic (i.e. long term) significance, because to an MMer, all you need to do is offset any nominal/monetary shocks to AD by adjusting the AD control, which could be Rm or it could be the quantity of base money. Either way. I'm not saying I agree, but that's the msg I got (and Nick basically confirmed that in a follow up answer)."

     http://worthwhile.typepad.com/worthwhile_canadian_initi/2014/02/two-interest-rates-and-a-simple-question.html

      See I had read Nick's post as well but I didn't realize that Rm is actually IOR and RB is FFR.  Here's Greg's response to Tom. 

       "I think its true to them in the long term, is it not? Definition of long term is nebulous it seems and the extent to which it affects the short term seems to be dependent on all those other extraordinary measures and rules which the Fed enforces. 

     "When he talks about Rb (FFR) and the tools to control it, or not, what does he mean by outlawing lending? The FFR is an interbank lending rate so does he mean outlawing banks lending to each other or is he talking about outlawing lending to consumers? Nick seems to have very strange ideas about what banks do."

      "I must confess to not really getting what Nick or Sumner mean when they discuss MOA or MOE."

      " because to an MMer, all you need to do is offset any nominal/monetary shocks to AD by adjusting the AD control, which could be Rm or it could be the quantity of base money"

      "Nick seems at odds to Moslers quote that a monopolist can control price or quantity of that which it has monopoly over but not both. His Rm is the price and monetary base is the quantity. He seems to think they can control both at the same time. "

     More from Tom:

     "So in the MM universe, if an exogenous demand shock occurs which causes demand for MOA to spike, in order to avoid a recession the smart CB will offset this shock to avoid all those harmful transients which will occur because of sticky wages & prices. So for example, in the gold standard world, if the demand for gold doubles, the CB should devalue the money by half: if currently $1 = 1 oz, then the CB should revalue the currency as $1 = 0.5 oz: This instantaneously offsets the shock and thus the recession is avoided. Mind you this recession (narrowly avoided) had nothing to do with any structural problems or fundamental aspects of the economy: it would have happened only because of the shock and the weirdness of money (the MOA being "money" here)."

      It's a great discussion. There's lots of moving parts here. What I do think is that the distinction of MOA vs. MOE could only be meaningful in the gold standard world. In our fiat money world the two are one in the same. 

     So I give my thanks to Tom for the scintillating discussion. He definitely understands some of this technical stuff better than I do-though I'm working on it. However I still can't quite buy into this:

      "so I think MMs see themselves as prescribing a means by which monetary policy can undo the effects of sticky wages and prices combined with nominal shocks: they see themselves as trying to neutralize the weirdness of money. This doesn't help too much with anything else driving the economy, and I think they realize that."

     "Now they might be totally wrong about how things work in the real world... but I think their intentions are good here: the real goal is to neutralize the weirdness of money and nothing more. That's how I see it anyway."

       My trouble is that Sumner's whole project is meant to pretty much tie our hands in how we run the 'real economy' by pigeonholing us into leaving all demand management with the Fed and therefore leaving nothing to the fiscal authorities but 'supply side reforms'-low taxes on the rich, deregulation, gutting the welfare state. 

      I can't say my misgivings are lessened by reading Tom's conversation with Nick either. \

      "...the goal of good monetary policy is to try to make Say's Law true."

       "Very clear and succinct. That implies that Say's Law isn't necessarily true... and that it requires good monetary policy in order to approach that ideal. I'd expressed the same sentiment (as a test... to see if I was getting MM ideas correctly) to David Glasner, but he'd admonished me for dragging Say's Law into it. To be certain, my question to David was clumsier and I may have confused him and myself in the process... but still on re-reading it, I detect a definite difference of opinion there between Rowe and Glasner. It'll be interesting to see if either of them has more to say on the subject."

         I don't think individual differences between David and Nick matter. Sumner is driving the train and he would wholly agree with Nick.  Nick basically said what I said the other day-the goal is a RBC world. 

         Another way to put it is how Sumner likes to: it's about 'driving a stake through the heart of Keynesianism.'

         More from Tom:

          "Mike, I can accept that their (or at least Nick's) idea is to make Say's Law true. I should really go refresh myself on Say's Law before I say something too stupid, but at one time I thought I understood it... which was why I was a little surprised that Glasner didn't think SL had anything to do with the goal of MM: I think I said to Glasner basically the same thing that Nick said to me (only it was buried in a lot of other words, and even then the kernal of it was clumsily stated)."

        It's not just Nick's idea it's the MM idea. Again, Glasner is something of a special case. I guarantee Sumner would follow Nick here. SL is basically that supply creates its own demand. That's what started this whole conversation. I had argued that Sumner basically agreed with RBC. Now SL is at the heart of all anti-Keynesian economics. Sumner may chide Prescott or Barro for not thinking the demand side matters but he wishes this were true and is trying to achieve it. 

        It's all about driving that stake through Keynes' heart. 

       P.S. I think in trying to determine whether an idea is part of MM doctrine, this exercise would work. If Sumner says it, write it down 10 times and put each piece of paper into the MM hat.If it's said by Nick Rowe, Marcus Nunes, or Lars Christensen write it down 5 times and do the same. With David I'd write it maybe one time. David Beckworth is probably more than 5 but fewer than 10-maybe 7. 

       This is not really precise but it gives you the general idea of who's driving the train.