Scott Sumner, public choice, and Karl Polanyi all meet up

by on April 22, 2012 at 12:34 pm in Economics, Political Science | Permalink

Through Interfluidity, where else?  Here is one bit:

Consider NGDP targeting. Under this policy rule, Treasury securities would become risk assets, whose real return would be geared to the health of the economy. (NGDP path targeting implies that shortfalls in real growth must be matched by increases in inflation.) Treasuries become low-beta index funds, diversified claims on the real production. Nominal yields would be more stable, but the real value of a future payment becomes as uncertain and volatile as the business cycle.

Read the whole thing.  In American politics, old people usually get their way.  In Western Europe, those governments have been obsessed with protecting insider interests for decades and they are not suddenly swept up with an enthusiasm for free market economics.  The problem isn’t “the Austerians”; do you really think that Pete Boettke is in charge?

ptuomov April 22, 2012 at 12:50 pm

A common logical error there in the original. Even if the portfolio is 1/3 stocks and 2/3 bonds, as it is in round numbers in aggregate globally, the proportion of risk in the portfolio is completely different. The equity risk dominates. If we get an economic recovery and moderate inflation, the increase in equity values will more than offset the decline in nominal bond values.

JVM April 22, 2012 at 1:02 pm

I completely agree, but I think since people are risk-averse, taking a risk on inflation does not seem worthwhile to retirees.

I guess in that sense I think this article is correct in the reasons why monetary policy has not been accommodating, but Scott Sumner is still correct that this is an error.

Bill April 22, 2012 at 5:56 pm

JVM Re: ” taking a risk on inflation does not seem worthwhile to retirees.”

SS COLA anyone?

Frankly, conservatives looking for a new way to reduce SS to support, justify or maintain a tax cut is more likely.

I’d bet a voucher on it.

Jeff April 22, 2012 at 1:10 pm

Cowen 1, Krugman 0

R Richard Schweitzer April 22, 2012 at 1:12 pm

Wasn’t Polanyi’s point “Self-Regulating” rather than “Free” Markets? Have markets ever been “Free?” Did he not avoid the point that self-regulation is not, and does not imply, results-oriented or objective setting in its functions?

Maxwell Harris April 22, 2012 at 1:31 pm

There’s electoral lag; not all politicians are as flip-flopping as Romney. Some have staked out pro-austerity positions, and would find it politically costly to abandon them. Pro-stimulus politicians may not be all that far away.

http://www.washingtonpost.com/blogs/ezra-klein/post/why-you-should-care-about-the-french-election/2012/04/20/gIQAhI0yVT_blog.html?wprss=rss_ezra-klein

Jamie April 22, 2012 at 4:55 pm

The question is, _which_ old people?

Some of them profess to believe SS is doomed. That, of course, is innumarate, ideological, or perhaps bordering on insensate.

Doc Merlin April 23, 2012 at 7:04 am

“Some of them profess to believe SS is doomed”

But SS /is/ doomed, its just a matter of when.

JWatts April 23, 2012 at 11:17 am

“But SS /is/ doomed, its just a matter of when.”

Not exactly. Social Security is only supposed to bottom out at roughly 70% of current levels (adjusted for inflation). So, retirees will still get a most of ‘their’ money. Of course 70% of current levels will certainly lead to some outrage, but doomed is probably to harsh a word.

Medicare, on the other hand, is a basket case. Doomed probably is the correct word, in that it will be forced to undergo drastic changes in the next 2 decades. Whether those changes are a doubling of Medicare taxes or a halving of costs or some combination remains to be seen.

ChrisA April 22, 2012 at 8:28 pm

A bond is a contract. Higher inflation is a way for someone to renege on that contract without consequences. Of course the people holding the bond object to that. An argument that “we will all be better off if you allow the government to inflate” to a bond holder sounds like a sophistry, naturally the debtors would want that. But using human normal intuition, when someone is arguing for a policy that will benefit them at your expense, you should oppose. This intuition is probably genetic, since people who fall for sophistry generally don’t last. So I think Steve Waldman is probably correct, the holders of bonds are probably more electorally stronger now than in the past and their intuition is driving a lot of the opposition to inflation of the economy through . Another factor, making the anti-inflationists electorally stronger (as well as the aging of the population) is the disintermediation of the financial services industry. More people nowadays are holding their financial assets directly rather than in financial products such as insurance contracts or company final salary pensions and are therefore more sophisticated investors and more aware of the impact of potential inflation. Also, thanks to the ’70s, there is a good natural experiment to refer to when inflation gets out of hand, for holders of fixed income instruments.

CC April 22, 2012 at 11:02 pm

the problem isn’t the austrians yet they advocate the same hard money inflation-phobic policies that the elite do…so they aren’t helping

Brandon April 23, 2012 at 3:01 am

“Austerians” dude. Austerians.

dkite April 23, 2012 at 12:04 am

Heh. Funny article. The whole thing is about examining the motives of those who disagree. Terrible, selfish, greedy, misinformed!

Sounds like a bunch of Creationists wondering about the evil of evolutionists.

Bill Woolsey April 23, 2012 at 1:55 pm

Those of us who favor a target for the growth path of nominal GDP as a _regime_ are not proposing a discretionary policy of sometimes generating inflation to shift wealth from creditors or debtors.

It is rather, that the inflation rate changes with “supply shocks.” This could be changes in productivity growth or shifts in the supply of particular goods.

A decrease in the supply of a particular good results in a higher price level, and temporarily higher inflation. A productivity slowdown results in inflation and a rising price level while it lasts.

On the other hand, an increase in the supply of a paricular good results in a lower price level and temporarily lower inflation (or deflation.) A productivity acceleration results in lower inflation (or deflation) as long as it lasts.

With nominal GDP targeting, creditors share losses (and gains) from changes in supply or productivity not closely related to the particular market where they have lent, just like everyone else in the economy. On the other hand, Cowen’s claim that this makes their loans into equity is false. Leaving aside bankruptcy, they don’t share the gains and losses in the particular firms or industries where they have lent.

Nominal GDP targeting is almost exactly like a gold standard or a money supply rule on this account.

For example, with a gold standard, government bond holders don’t get compensated when gas prices rise because there is a decrease in the supply of oil. With a gold standard. if productivity grows more slowly, the result will probably be lower ex-post real interest rates. The inflation rate would be higher, (though that might be a less deflation, a slower rate of price decrease.)

The same is true with a quantity of money growth rule. If the quantity of money always grew 3% as Milton Friedman and the other old Monetarists proposed, if there was a decrease in the supply of oil, the result would be a higher price level and a temporary increase in inflation. Also, a productivity slow down, say with real output only growing 2% for a time, would result in 1% inflation for a time. Any lender who had already committed to lend at say, 5%, would have a real interest rate of 4% rather than 5% due to this inflation.

It is only “inflation targeting” where the central bank activitily seeks to offset this changes, and so seeks to shield creditors from any loss.

Why is that a good idea?

If you only think in terms of one good economies and representative agents, then all supply shocks are the same. The entire issue of shocks specific to firms and industries, versus those that impact other sectors of the economy disappears. The actual contracts that developed in the market economy did not involve borrowers promising to make lenders whole based on shifts in other sectors of the economy.

Of course, they gold standard did make every contract a speculation on the relative price of gold. And a fixed growth rate of money rule makes every contract a speculation on the demand to hold money. Both nominal GDP targeting and inflation targeting avoid that–which I think is a good thing. But inflation targeting goes to far, and imposes excess risk on everyone else in order to shrink the risk to creditors to zero.

Think about a blight reducing the supply of corn. The price of corn rises, and the price level rises as a matter of arithmetic. Is it really wise to have a monetary regime that immediately forces all the other prices in the economy down a bit to keep the price level stable? Sure, it makes sure that those holding money and creditors take no real loss. While everyone else in the economy has lower real income because there is less corn, the slight reduction in all other prices means that those holding money or having lent money, have lower prices for everything else sufficient to compensate them for the higher price of gold.

There is lower real income because of the corn blight. There is less corn. How do creditors avoid all loss? Everyone else’s real income is reduced by more.

Again, is this wise?

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