Mr. Krugman's peculiar post
By Scott Sumner
Paul Krugman seems annoyed by the recent modest success of market monetarism, at least in terms of becoming part of the discussion. But the post contains only one tiny critique of our actual policies:
I don’t buy this on the economics; to do what’s needed central banks either have to take on a lot of risk, which is in effect a form of fiscal policy, or change inflation expectations, which is far beyond conventional monetary policy. But we don’t need to hash this out here. The more important point is that the neomonetarists are deluded in imagining that there is any constituency for their ideas in the modern conservative movement.
Lots of problems here. The country that came closest to NGDP level targeting in the recent cycle was Australia. Their NGDP grew at a 6.5% rate during 1996-2006, and at a 6.5% rate during 2006-12. As far as I know all the other developed countries saw significant NGDP growth slowdowns. Australia never hit the zero bound, and its ratio of monetary base to GDP is a measly 4%. In other words, a small balance sheet and no risk. Adoption of market monetarist policies would actually reduce central bank risk. In any case, central banks are part of the consolidated government balance sheet (de facto) and any bond price risk absorbed by the Fed is exactly offset by the opposite risk at the Treasury. So it’s a phony issue aimed at scaring people away from QE.
It’s the rest of Krugman’s post that has me scratching my head. Almost the entire post is devoted to criticizing our enemies. How does it reflect poorly on market monetarism if the people that disagree with us have goofy views? Yes, Congressional conservatives have not bought into 4.5% NGDP targeting, but they would be even more opposed to Krugman’s call for a 4% inflation target. So what’s the point? I’m not even trying to convince Congressional conservatives, I’m trying to convince influential people like Michael Woodford, Christy Romer, Jeffrey Frankel, Jan Hatzius and Paul Krugman. Oh wait, the first 4 are now on board with NGDP targeting, and even Krugman said a few nice things about the idea.
Right now Congress plays no role in the policymaking process. They’ve given the Fed its dual mandate, and they aren’t about to change that mandate, just as they aren’t about to do fiscal policy. Our only hope is to convince the Fed that targeting real growth plus inflation is more consistent with the dual mandate than simply targeting inflation. The Fed tends to do what a consensus of economists think they should do. That’s why they screwed up in 2008.
The Fed is a cautious and conservative institution, and that’s probably a good thing. That means we must change the profession before we change the Fed. If we ever reach a point where most macroeconomists support NGDP targeting, the world’s central banks will follow.
Market monetarists are (for the most part) neither Democrats nor Republicans. We see two problems out there, conservatives who favor overly tight monetary policies, and liberals (like Obama) who ignore monetary policy and focus on ineffective fiscal stimulus. Given how most of us are obscure academics at small institutions, I’m actually amazed at the reception we’ve gotten from both sides of the spectrum. Over the past 5 years I’ve met many dozens of people who have become sold on NGDP level targeting. I don’t know the exact breakdown, but I’d guess it’s roughly half and half, liberal and conservative. What other school of thought can make that claim?
Yes, the GOP is in favor of tight money right now, but just wait until they retake the presidency. They weren’t complaining about inflation under Bush, when it was higher than under Obama. Ideas percolate upward from the intellectuals to the policymakers. I’ve been invited to give talks to most of the top think tanks on the right, in the US, Britain, and Australia. There is lots of interest in market monetarist ideas on the right. I don’t expect to change the mind of well-established academics like Meltzer and Taylor, my goal is to generate interest in NGDP targeting with the next generation of bright young economists, people like Evan Soltas and Yichuan Wang.
Given that NGDP targeting is one of the few ideas that havesubstantial support on both the left and the right, I expect it to eventually win out at the Fed. A few regional Fed presidents have already said good things about the idea.
But again, I’m totally confused by Krugman’s post. If failure to convince hard right GOP politicians and economists is the sign of a failed intellectual movement, why aren’t Krugman’s ideas even more discredited? Obviously Krugman’s ideas are not discredited, they are influential in certain circles. But so are market monetarist ideas. So what’s the point?