The real MMT
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.”