I have a new piece at The Hill:
Despite its name, however, MMT offers little guidance to the Federal Reserve. Indeed, its proponents typically argue that controlling inflation is the responsibility of Congress and the president, not the Fed.
Ironically, recent developments in Fed policymaking adhere much more closely to a very different “modern monetary theory”: market monetarism. Market monetarists believe that any targeting of inflation should be done by the Fed.
Although market monetarists are best known for advocating nominal GDP targeting, the specific “market” part of “market monetarism” refers to the belief that Fed policy should be guided by market forecasts, not highly technical computer models of the economy. There are signs that the Fed is moving in this direction. . . .
This past December, stock prices and bond yields fell sharply on worries that economic growth was slowing. In response, the Fed adjusted its 2019 plans, scrapping plans for two expected interest-rate increases.
This shift was not based on macroeconomic models of the economy, but rather market signals. With “output gap” models no longer producing reliable policy guidance, the Fed is now almost forced to rely on market forecasts. . . .
An even better approach would be to create and subsidize trading in futures markets that forecast nominal GDP growth.
Read the whole thing.
In other news, the NYT recently ran an editorial suggesting the Fed ought to consider several options, including nominal GDP targeting.
Already there are a number of interesting ideas in circulation. Mr. Powell’s immediate predecessors, Janet Yellen and Ben Bernanke, both have backed a proposal for the Fed to allow higher inflation after periods of low inflation — in effect, replacing the Fed’s 2 percent annual inflation target with the goal of hitting a 2 percent average over time.
Others would like the Fed to set a 4 percent inflation target, or to replace inflation targeting entirely. Under one alternative, nominal G.D.P. targeting, the Fed would aim for a steady rate of growth in the value of the nation’s economic output — a measure that includes the effects of inflation. During periods of slower growth in the inflation-adjusted value of that economic output, the Fed would seek to compensate by allowing higher inflation.
Check out the NGDP link.
Bloomberg also cited me:
Scott Sumner, director of the monetary policy program at the libertarian Mercatus Center at George Mason University, has questioned both Trump picks. “Do the candidates have good judgement on policy?” he wrote on his blog, The Money Illusion. “I am not aware of any coherent economic model, liberal or conservative, which would justify calling for tighter money in the early 2010s and easier money today.”
Update: Another mention in today’s MarketWatch:
“MMT has many Keynesian aspects to it,” said Scott Sumner, a senior research fellow at George Mason University’s Mercatus Center. “You boost spending to boost GDP growth. Keynesians say you prevent inflation by tight money. MMTers say you raise taxes.”
Sumner pointed to a real-world case study of MMT that failed miserably.
“In 1968, (President) Lyndon Johnson raised taxes,” which produced a budget surplus in 1969. “But raising taxes and balancing the budget didn’t control inflation.”
READER COMMENTS
Ahmed Fares
Apr 10 2019 at 9:51pm
From Stephanie Kelton’s response to Paul Krugman:
The tradeoff that matters is the one that Hyman Minsky and James K. Galbraith have highlighted. Monetary policy “works” by driving people into debt. Fiscal policy works by driving income into people’s pockets. As Galbraith put it:
There are two ways to get the increase in total spending that we call ‘economic growth.’ One way is for government to [deficit] spend. The other is for banks to lend. For ordinary people, public budget deficits, despite their bad reputation, are much better than private loans. Deficits put money in private pockets…This is called an increase in ‘net financial wealth’… In contrast, when a bank makes a loan, the cash is not owned free and clear.
That’s the tradeoff that interests me. Should we lean more heavily on (monetary) policy that works by leveraging the private sector’s balance sheet or on (fiscal) policy that works by strengthening it?
Garrett
Apr 10 2019 at 11:01pm
In a world where private debt were illegal, would the Fed not still be able to control the money supply and expected future path of the money supply by continuing to buy/sell treasuries?
Mark Z
Apr 11 2019 at 12:33am
“Monetary policy “works” by driving people into debt.”
Kelton says this like it’s a bad thing. The assumption is that more borrowing is inherently pernicious. You can see, though, why a mechanism in which money is loaned out according to who’s willing to borrow it (and therefore likely to have ideas about how to use it productively) is more productive than one that simply distributes it. It seems like allocating capital according to where there’s most demand for it will lead to better allocation.
Floccina
Apr 11 2019 at 10:31am
That steers me toward Gearge Selgin’s idea where government money replaces gold in a free banking system. The banks would have an incentive spend in a deflation period.
Scott Sumner
Apr 11 2019 at 1:16pm
Monetary policy has nothing to do with lending. It’s about changing the supply and demand for the medium of account. It works fine in an economy with no lending.
Benjamin Cole
Apr 10 2019 at 11:35pm
(Note to Scott Sumer: A proposal from Ronald Reagan, not Don Trump, is at the bottom of this comment)
Yes, the MMT crowd has some quirks.
But they do have a point: Monetary policy works in large part by boosting bank-lending—boosting outstanding debt. The endogenous creation of money.
Money-financed fiscal programs, of the type Ben Bernanke has advocated from Japan, do not, but also increase demand.
Adair Turner, who has thought deeply about these issues, and also about these issues in connection with real estate, has advocated “helicopter drops on a leash.”
In Western economies, a stimulative central-bank policy seems to generate a lot of lending on extant property.
And the secular trends in interest rates and inflation are towards zero anyway, and we are there already in some respects in Japan, Austria, Germany, Switzerland.
I think the inevitable future for monetary policy is NGDPLT with tools that work, such as money-financed fiscal programs.
For Scott Sumner: President Reagan’s proposal to put the Fed into the Treasury Department is looking better all the time!
robc
Apr 11 2019 at 9:56am
How come no one ever proposes ending the Fed and returning to the gold standard?
Then you don’t have arguments over targeting because there is no need. And no one to do it anyway.
Mark Z
Apr 11 2019 at 12:33pm
I think this would depend on the re-legalization of private note issue.
Scott Sumner
Apr 11 2019 at 1:15pm
People don’t talk about returning to gold because most people understand that it would be a bad idea.
Ahmed Fares
Apr 11 2019 at 5:14pm
In short, you don’t get anything out of a gold standard that you didn’t bring with you. If your government is a credible steward of the money supply, you don’t need it; and if it isn’t, it won’t be able to stay on it long anyway. (See Argentina’s dollar peg). Meanwhile, the limitations on the government’s ability to respond to fiscal crises, the necessity of defending against speculative attacks in times of crises, and the possibility of independent changes in the relative price of gold, make your economy more unstable. It’s a terrible idea, which is why there are so few economists willing to raise their voices in support of it. —Megan McArdle
Brian Donohue
Apr 11 2019 at 10:23am
Years of dogged, relentless determination. Very happy for you. Make the MMT conversation the MM Moment. Keep on truckin’.
Alan Goldhammer
Apr 11 2019 at 1:07pm
I had a post on this topic last Sunday that for some reason disappeared shortly after posting. Perhaps I had too many links. No matter, here is a good analysis by James Montier who serves on the allocation team at GMO, a large investment firm who manage more than $100B of funds for largely institutions (disclosure – I am on the Board of a Non-Profit who has funds at GMO). Montier has written a rather well done by my non-economist standards critique of the critics of MMT. He also has a simplified explanation of MMT and as he states “For me an economic approach
must help me understand the world, and provide me with some useful insights
(preferably about my day job – investing). On those measures let me assure you that
MMT thrashes neoclassical economics, hands down.”
It would be nice to get real economists views of this paper. I don’t think you need to login to get the paper.
Bill Woolsey
Apr 11 2019 at 2:38pm
Fiscal policy involves increasing government debt. It imposes a burden on future taxpayers. If it involves increased government spending, it also involves a shift in the allocation of resources from private to government goods. If it is done by tax cuts, then it just changes what private goods are produced for whom.
Monetary policy usually works by changing debt that is not suitable as a medium of exchange into debt that is suitable as a medium of exchange. While the amount of debt is usually increasing, monetary policy works by changing part of that debt into a form that can be used as money.
For example, an open market purchase of government bonds by a central bank changes the form of debt–the government bonds into bank deposits. Government bonds are debt, but a bank deposit is also a type of debt. It is money owed by a bank to a depositor.
But the depositor who sold the government bonds can use bank deposits to make purchases by check or debit card. The total amount of debt did not change, it rather changed its form.
Now, if the investor who sold government bonds to the central bank had sold them to someone else, then that investor would have still had the extra money to spend. However, the person who purchased the bonds would have less money to spend. When it is an open market purchase by the central bank, no one has any less money. There was no increase in total debt. There is a change in the form of debt.
The bank that owes the money is in turn owed money by the central bank–the bank has an increased balance in its deposit account at the central bank. That is also best understood as a form of debt.
While it is possible that an increase in the quantity of money would be matched by an increase in total debt, that isn’t necessarily true
So, Galbraith is telling a story where “monetary policy” is about lowering the interest rate so that people borrow more money from banks which means that they necessarily have more debt from banks. Those who sell to those borrowers end up with more money and they don’t have any more debt.
That isn’t what monetary policy is about. It is about changing the quantity of money (or the demand to hold it.)
By the way, what we call “growth” is an expansion in the production of goods and services. It is not an increase in spending. Of course, firms will only produce goods and services if they can sell them, and that requires spending. But people fund their spending out of the income they earn. And increased production generates a matching increase in income.
While it is possible for a given amount of money to fund more spending–it just must be spent more times on average–generally the demand to hold money grows with income. That is why the quantity of money needs to grow–to accommodate this added demand to hold money.
It is also true that with growing income firms and households want to both lend and borrow more, and so “debt” increases.
But output, income, spending, and the quantity of money can all increase without there being any increase in debt.
If money is based on debt, and no one ever wants to borrow more that the current level of borrowing, then eventually all debt would be in the form of money and it would be impossible to increase the quantity of money without there being more debt.
Alternative, if we imagine an economy where no one wants to borrow or lend, then the type of monetary system we have today could never get started.
But that isn’t the world we came from. Further, we are a long way from all debt being in monetary form. And we have no reason to expect that as income and output grow, people won’t want to borrow and lend more.
Lorenzo from Oz
Apr 11 2019 at 7:45pm
Congratulations on the continuing momentum. I have always found your market monetarist arguments persuasive, but then I did not have strong macroeconomic baggage to defend.
The MMT thing may indicate a growing space for new ideas, which includes wacky ones. In any contest between MM and MMT, I know which the academy will find easier to swallow, fortunately.
Also, notice how ‘market monetarism’ is an informative label, while ‘modern monetary theory’ is a label in search of content. A difference that is informative in itself.
Scott Sumner
Apr 12 2019 at 12:54pm
Alan, That’s a terrible analysis, full of mistakes and misrepresentations of the critics of MMT. Contrary to his claims, fiscal policy is not more powerful than monetary policy and it is not useful to view money as being “endogenous”.
Bill, Good points.
Thanks Lorenzo, I generally find your historical analysis to be persuasive.
Comments are closed.