Why nominal gdp targeting is an especially good idea right now

I’ve been hearing plenty of calls for a higher inflation target, perhaps four percent.  I do understand the case for this, and furthermore it is not obvious that the higher rate of inflation would bring significant social costs.

The thing is this: whether rationally or not, the American public hates higher rates of price inflation.  Perhaps they mis-sample or mis-estimate prices, or perhaps the higher prices really do erode their real wages in a way they can’t get back through a new labor market bargain.

So a higher price inflation target would mean that everybody would hate the central bank.  It would not shock me if the first thing they did was to dismantle…the higher price inflation target.

Under nominal gdp targeting, the rate of price inflation would not have to significantly rise until worse times were upon us.  That is precisely when such upward price pressures would be most useful.


First! Inflation is over-rated, deflation is under-rated. I would say an ideal environment is a stable (0 +- 0.5%).

So explain the big draw of inflation. What makes you think that debasing currency is remotely desirable? Is it that A) you turn cash into a hot-potato game? Gotta spend it before it becomes worthless? That any market activity is good market activity? Does that not seem like causing people to spend when they'd otherwise hold onto cash would lead to misallocation of resources, which is a behavior that "shrinks the pie", so to speak, rather than growing it?

Or is it that B), we realize we cannot pay down our debts, and we're admitting that anyone stupid enough to take dollars just got swindled? Is there a C)?

I understand the fear of deflation, that you'll have less market activity, people only buying necessary consumable goods and assets that appreciate faster than dollars (which does not sound so bad, put that way, but I get the problem). But I think the ideal situation is one where people buy exactly what they need and want, without being penalized nor rewarded for waiting for the proper time to buy.

The big draw of inflation is that pay cuts are not socially acceptable, but just as some people deserve raises, some deserve pay cuts. Inflation allows employers to cut wages among the employees that they want, without the social costs.

Except Tyler writes:

"erode their real wages in a way they can’t get back through a new labor market bargain."

I thought the whole point of higher inflation was to erode sticky nominal wages such that we achieve full employment.

Are we at full employment now? If not, then damn what's taking so long? If so, then why do we need monetary stimulus?

Deflation is overrated as a risk. Mild deflation is healthy and desirable. It offsets people's positive time preference.

No no no no no. Mild inflation (2% ish) is much better than mild deflation.

The CPI has increased on average by 3.2% per year over the past century, 3.8% per year over the past 75 years, 4.1% per year over the past 50 years, 2.3% per year over the past 25 years, and 1.7% over the past 10 years. Inflation is very far from being a problem right now.

To the rest of your comment:

There are still a lot of prime age (25-54) folks out of the labor market. Not sure how many of them will come back, but as long as we see 200,000 new jobs per month, we know some of them keep coming back.

Why such a slow, long U-shaped recovery, rather than the sharp recovery like after 1982? Not sure. Balance sheet recession? Lotta people over their skis/ swimming naked in 2007? The Great Chastening?

Anyway, many fewer people are swimming naked these days. That's a good thing. I'm not sure why a recovery like this can't run few several more years yet. Little by little.

Mild deflation is okay if it is a result of productivity increases. As a result of monetary contraction, it is a catastrophe.

Cliffs nails the point. Don't look at the price change - look at the cause.

Why such a slow, long U-shaped recovery, rather than the sharp recovery like after 1982? Not sure. Balance sheet recession? Lotta people over their skis/ swimming naked in 2007? The Great Chastening?

1. There's been a secular decline in economic dynamism. Growth in domestic product per capita (in chained dollars) averaged 2.36% annually from 1947-70, 2.06% annually from 1970 to 1991, 1.58% annually from 1991 to 2009, and 1.31% annually since 2009.

2. See Casey Mulligan. The current administration has undertaken a raft of regulatory measures which reduce employers' propensity to hire. Extended UI also inhibited some labor contracts. You had an abrupt drop in the employment-to-population ratio (though it was still within post-war ranges seen previously) and that has repaired itself only quite slowly.

3. Labor markets heal slowly. IIRC, it took 15+ years for the British labor market to recover from the recession experienced ca. 1982. Unemployment rates did not hit a plateau until 3 years after production began to grow again (and the plateau was at the depressionary rate of 13% of the workforce).

It's not that inflation is good. It's that mild deflation is WAY worse than mild inflation, and our measurement is imprecise.

So 2% measured inflation means a minuscule chance of actually having deflation, while a 0% measured inflation means a pretty good chance.

I can accept this. Mild inflation is ok in my book... but 4% is not mild. Out of ignorance, what is the tolerance of our current inflatiometer? +1 -2?

It really doesn't matter what the inflation is as long as it is predictable. Sure 100% would be stupid because there would be such high costs of structuring everything to deal with that, but 2%, 4%, 6%, all would work find as long as they were predictable over the long term.

No one really knows or agrees, especially since the are political axes to grind here. However, everyone agrees that no one really knows.

I'm seeing a couple camps emerge. We have consistency in rate (Cliff), consistency in nominal value (me currently), lowering central bank authority to control inflation (Mofo), and... what to call Donovan's stance, Never Deflation?

I would like as a nation to stop borrowing, yes, which requires more revenue or less spending. That`s my axe to grind, but i acknowledge we'll have to inflate our way out to some degree. That's not to say I find it to be good general policy.

Regarding the "Stop borrowing" idea:

The complication in that is that Treasury bonds have become a key feature in global financial stability. There is a consumer demand for them unrelated to the US Government's need to issue them. That gives us the opportunity for some debt arbitrage here.

What we should do is issue way more T-bonds, using them to fund a sovereign wealth fund. Essentially, the Treasury department would be authorized to issue T-bonds until a target yield is achieved, and invest the excess beyond what is needed to fund the government. Returns from the sovereign wealth fund would be lockboxed to cover interest on the debt.

Politically, this would have to be combined with some sort of control to prevent all the additional debt from being hoovered up by additional spending, but also not interfere with temporary deficit spending. Perhaps Treasury could be only allowed to issue Sovereign Wealth Bonds in fiscal years when a real budget has already been passed.

Is mild but unmeasured deflation actually bad?

(i.e., does the situation where some baskets of goods have slightly deflated, but most baskets of goods have slightly inflated, and indeed the official baskets of goods have slightly inflated) actually provoke the hoarding responses that make measured deflation bad?

Deflation is a decline in the general price level

The real issue with 0% inflation is the FED can't run interest rate target to deal with demand shocks. They have to turn to unconventional tools. I think its quite apparent that real growth has moderated and the natural real interest rate isn't very high between 0-1.5% depending on the country. So you likely need inflation of 3-4% to get nominal rates into the 4-5% range. Only way FED can run interest rate targeting to moderate changes in demand is by accepting a higher inflation target.

Deflation is awful. A scheme by which you become richer by stuffing dollar bills in your mattress embodies atrocious incentives.

Also, sticky wages. Why do you think so many people lost their jobs at the same time in the Great Depression and the Great Recession?

This is completely wrong.


Inflation is awful. A scheme by which governments and central banks welsh out of fair trade by stiffing the rubes forced to accept the currency... creates atrocious incentives.

Also, runaway inflation. Why do you think the market broke down in the weimar or zimbabwe?

Please prove your assertion that deflation is worse for John Q Citizen before you go Ooga Booga.

Inflation is mostly bad for creditors. Deflation is bad for debtors.

Inflation is especially bad for John Q. Moneybags.

Inflation has run at over a 3% clip for a century now. And that's the story of how America went from the land of opulence to mass subsistence living.

So by your own admission, In other words, it rewards borrowing and penalizes savings. What was this you said about atrocious incentives again? What's the savings rate of JQC, again? Oh. Oh, dear. Incentives do matter after all.

I wouldn't make boasts of median Americans prospering because of inflation. Innovation has more to do with it, and i suspect (ooga booga myself here, sorry) that we're in yet another bubble.

Yeah. Hyperinflation equals confiscation, but persistent low-level inflation does not wreck an economy, as America in the 20th century attests.

My point is that the downside of inflation affects holders of financial assets (cash, bonds.) Generally, this is not John Q. Citizen. John Q. Citizen is more likely to be on the other side of these deals, holding a mortgage or maybe a bunch of student loans. These loans were created with an 'expected inflation' component embedded in the rate. To the extent actual inflation has fallen short of expectations, like it has for several years now, these debtors are feeling it and the creditors all laughing all the way to the bank.

No one is calling for hyperinflation. But would it kill the Fed to hit its own fucking target from time to time?

The idea that "we can't have inflation cuz the little guy" is 100% wrong.

I'll agree with this to some extent. If I feed a stray cat, i help it out in the short run. If I do this for 20 years, I've created more problems than I've solved. At what point do you stop feeding the strays? Sometimes the correct path is painful in the short term, and, uh, I feel the pain of the mid and lower class. Please stop 'helping' me. The student loan bubble needs to burst so badly.

The idea that we can't have deflation cause of the little guy is at least 50% wrong.

Also, lol the Fed. If they can't hit their target, either they don't know what they're doing or they're bad at it. The only thing keeping them relevant is their capacity to do harm.

Brian -- I wouldn't say "cuz the little guy" is 100% wrong... somewhat wrong, but not 100%. As you say, the little guy is definitely better off with inflation if s/he already has a (fixed-rate) mortgage and some (fixed-rate) student loans. But what if the little guy needs a new car? I remember my mom buying a car in the early 1980s and paying 21%. Did she get a 21% wage increase to go along with it? Nope.

In the 80's inflation of 6%+ was considered a good thing. Why would inflation now of 2-4% be 'making the dollar worthless' and 'not being able to pay our debts'?

Because I could get that much back, or a bit more, by keeping it in a savings account or a CD. I can't do that now, I have to participate in VANGUARD FUNDS in order to maybe keep up.

@HL: If inflation was at 6% interest rates would be higher too.

Banks weren't stupider back then, if inflation is 6% a bank isn't going to pay you 6% on a savings account. Obviously if inflation move from 2% to 4% savings account interest rates would rise as well.


Inflation (CPI) was around 4-5% from 1983-1990, interest rates were roughly double inflation.

Since 2008 inflation (CPI) hovers around 1-2% with interest rates being roughly 0%.

If the worry is that a higher inflation target would reduce real interest rates, then it's mistaken. Real interest rates are not under central bank control except for short periods of time. (Experts disagree as to how short.) Right now, life sucks for savers because the natural rate of interest is very low.

In the 80's people still remembered having double-digit inflation. Heck, some of it was _in_ the 80's. So 6% was good, by comparison. Doesn't mean it was good in and of itself.

n the 80’s inflation of 6%+ was considered a good thing.

By whom? The CPI increased by a rate of 3.9% during the 1982-91 business cycle. The GDP deflator increased at a rate of 3.3%.

Yeah. The proles need to learn how to become rich by giving their money to 30-yo MBA's.

You're right. It's 1969. Vanguard barely exists.

If you've a defined benefit pension plan, someone better be managing it to keep it actuarially sound. That person better be schooled to do so.

I'm a pension actuary. In the context of pensions, 'actuarially sound' is an unfortunately elastic concept.

In corporate America, rules are much tighter than mere 'actuarially soundness'. US taxpayers will likely never have to shell out on account of these plans. US employers, on the other hand, will likely pay 2-3 times more than they originally reckoned.

All prices should rise, except the price for labor, which should fall.

You should go start a company. Hire a bunch of people. Then cut their wages.

Your comment suggests zero connection to the real world. Under inflation, nominal wages generally rise along with other prices.

But not everybody increases their productivity all the time. Some people may actually suffer declining productivity. You think these people should be fired apparently.

In the second half of 2008, prices fell 4%. Huge outlier. Without wage adjustments, that's a 4% increase in real wages. Did everyone deserve such a raise because of increased productivity?

In the following year, 9 million people lost their jobs.

"Under inflation, nominal wages generally rise along with other prices."

Let’s Get Boomer Jobs

"Today, the 90th percentile wage in that industry is less than the annualized post-pay cut average wage in 1985. To give you a sense of 90th percentile vs. 50th percentile in the economy generally, the 90th/50th for household income today is $160,000/$55,000; a meatpacker earning $36,000 today is as rare, relative to his industry, as a family earning $160,000 is to the country as a whole. Pre-pay cut boomer slaughterhouse dad was making 87% of today’s average household income all by himself, so if his wife was a part-time school secretary or something, they were ahead.

All this is to say that the Lord of the Milfs is doing about as well as the average meatpacker was in 1984—sure, his college, housing and healthcare expenses are a lot worse, but on the other hand, he probably has an iPhone and he makes a few percent more. On the other hand, the average meatpacker today is making less than twice minimum wage and less than a random-ass college student made in 1985. No wonder boomers could pay for college with their summer jobs. Those summer jobs paid great. Meanwhile, the guy who ratfaced his way into a slick corporate IT job—good job, by the way, buddy, you’re an inspiration!—finds himself freaking out over a kid. Why? Because he’s working class, even if he does wear a sweet Van Heusen cotton-poly number that he bought on sale at Sears instead of denim coveralls. He probably makes quite a bit less than his dad.

What caused all this? Well, one explanation is that American labor just isn’t efficient enough to justify higher wages. After all, you can’t get paid what you didn’t produce, unless you’re a rat-faced man. But that explanation is crap. ( http://www.bls.gov/opub/mlr/2002/06/art4full.pdf See p. 4, e.g.) American workers are highly productive and have consistently gained relative to other first-world nations. I’m not saying it was highly exploitable scab labor from the third world, but… (http://cis.org/New-Data-Immigration-Surged-in-2014-and-2015)"


Wages stink despite being more productive, the government is inflating us out of existence thanks. Thank god for the oil glut, otherwise the CPI would be a disaster.

You've got the arrow of causality wrong there. Prices fell because people lost their jobs. The problem, here, is that for a long time the Fed responded to recessions by reducing interest rates. This creates short-term growth, no question, as people suddenly have more of an incentive to borrow money to invest. People warn that it reduces the incentive to save, and it does, yet not by all that much. In the final analysis, people who save are going to save no matter the interest rate. But the problem is that this is often not temporary, and now interest rates are approaching the point where they can't go any lower.

Inflation gets you out of this problem. But is it desirable? It leads to short term growth, but does it lead to long term growth? Only if the money invested is invested in things that are productive long term. Japan for a long time held its interest rates low, providing cheap capital to its industry, which allowed them to continually invest in productive capacity. But if the money invested is used for a bunch of non-productive endeavors, its a recipe for long term stagnation that will require yet another "solution" five years down the road.

This isn't to say that tight-fisted policy, low inflation and high interest rates, is the answer. The problem is automation, and the resulting inequality it creates. It leads to a massive accumulation of wealth in the top 5% of the country. They have so much that even with luxury consumption, they have little to do with their money but put it in the bank. Low interest rates incentivize that money to flow throughout the economy, benefiting regular people temporarily, but at the end of the day the money will need to be paid back. For the last thirty years, low interest rates have been the substitute for the redistribution that the economy really needs.

@Trump fan,

"Prices fell because people lost their jobs."

Nope. Employment peaked in January 2008 (138.4 million), but by July, jobs had fallen by < 1 million (137.5 million).

CPI-U peaked at 219.964 in July 2008 and fell 4.4% (unannualized) in the next six months, bottoming out at 210.228 in December 2008.

The jobs trough didn't occur until February of 2010 (129.7 million). Almost 90% of the job losses occurred after prices began to fall.

There was always gonna be a recession, but the Fed was a big part of the problem.

"There was always gonna be a recession, but the Fed was a big part of the problem."

The Fed created too much money?

Or the Fed failed to push the string so much faster velocity fell much much much faster than it has?

How do consumers who are unemployed or working minimum wage jobs supposed to get all the money the Fed creates?

Why isn't Trump buying 5 times as many burgers and fries to create shortages that drive up prices of burgers and fries?

Why aren't hedge funds buying up burgers and fries based on future price hikes in burgers and fries?

In my world, the only way people spend more money is they get paid more money, but since 2001, most of the people I know have been getting paid less money to work and few are seeing the frequent offers of high pay if they switch jobs like in the 90s. And in the 90s, at least 20% of the jobs had something to do with government. Work on supercomputers to compete for DOE projects. Work on Y2K. Work on network security. Work on getting everyone on the Internet including government. Work on replacing paper with electronic transmission of data to government. Work on replacing all video technology in the US from analog to digital and digital displays.

In 1999, the goal was HDTV by 2005 at the latest and analog gone.

Deflation pays people to do nothing. Either people should work or their money should work but rewarding doing nothing does not seem like a good idea.


Why all this technical innovation and success if I just gotta keep busting ass and life's just getting harder. Whats the goddamn point to all this?

Oh I know. To sit quietly in one spot for 80 years or so watching our dollars increase in value due to awesome deflation, then shuffle off this mortal coil.

Or to build high-trust societies with goods that last beyond the next decade.

@AG, Yup. All those happy, homogeneous high trust Northern European countries, all because of their resolution to stick to the gold standard.

I mean, seriously, even Odysseus know that the lotus-eaters way of life was depressingly awful.

Struggle. Disappointment. Heartbreak. Struggle. Joy. Success. Repeat. That's the deal.

Zimbabwe has that in spades.

Keep striving and taking on debt brother! It will all work out in the end

You sure have a lot of time for Internet comments for a guy struggling through life. Maybe if you were a little less inclined to goofing off at work we wouldn't need to destroy savers assets to drive productivity.

But I get it you are probally up to your eyes in debt so this is pretty motivated reasoning.

@AG, Is there somewhere on Earth that doesn't? Would you want to move there?

@HL, I'm debt free. This isn't about me. I have nothing to gain directly from inflation.

It has nothing to do with "destroying savers' assets". Where inflation goes, interest rates follow.

"Deflation pays people to do nothing."

Isn't that what being a rentier is all about?

that is having their *MONEY* work, TOTALLY DIFFERENT and is A-OK

I'm going to wait until next year to replace something because there is deflation and it will cost less next year.

And, next year I might do the same.

And on and on it goes. Anything more than the most trivial level of deflation can rapidly trash an economy in an absence of other polices to sort out the situation. And no having deflation is much easier than having deflation + fixing problems from it.

I've been thinking about buying a PC but I'm going to wait and see if they go down a little in price. Maybe next year.

Key word: "REPLACE".

As new regulations promote buying new cars and appliances so does bloated software encourage new PC purchasing.

Given current credit card debt and credit card interest rates to buy things now, I don't think people generally would be impressed by the idea they can save 4% by buying next year.

If you're already in debt, wouldn't the prospect of saving money by buying later be nice?

Or, are you saying something about people being addicted to their spending and just cannot wait? I don't really get your point.

As we all know, inflation and deflation are just measurements of changes of some consumer price metric (a basket of goods blah blah) thought up and subsequently adjusted by some department. Any relationship to the facts on the street is debatable.

Hopeless over-rating of the power of macroeconomic musing.

Yes, Keynesian fantasy has always been hopeless for the "American Public".
Why does TC cling to it?

Keynesian? You are clearly one of those people that slots Milton Friedman into the Keynesian camp.

My money is on "internet Austrian".

Monetarism is absolutely a offshoot / heresy of Keynesianism. Friedman didn't even really try to deny after failing a few times to articulate a difference between the two.

Translation: I can't admit you're right 'cause my degree would be exposed as worthless.

Yeah, I'm a 50 year old businessman, yet every day people are challenging the value of my college sheepskin, and I fear that the whole edifice could come crashing down any time.

Help a pal out and keep this on the QT, k bruh?

How would the retirement plan market be affected by 10 years of 1-2% deflation

I think a lot of Americans believe that the word "Keynesian" means "whenever the government decides to spend money". Press them on the matter, and many who use the word will admit this isn't accurate. But that is not how it's normally used.

What makes it "Keynesian" is the AD-AS perspectives relating to certain macro variables, and that this is conducive to thinking that there are times where intervention can stave off recession and improve long-run growth by increasing AD in a way that does not lead to human and physical capital rotting away during the months or years until things get better.

Whether this balances out with the reduced long-term benefits from creative destruction is an altogether different question ...

Keynes argued that rents and profits need to be zero and that is they will not go to zero by natural market action, then government must force labor costs be incurred to build more productive capital until profits and rents go to zero.

Friedman argued labor costs should be held down to maximize monopoly profits and rents even if gdp was sacrificed because the Keynesian focus on higher labor cost investment only inflated prices which inflates wages which inflates demand which inflates costs which inflates prices as too much investment produces too much stuff and too much demand and too much consumption.

But Friedman never imagined velocity could fall as rapidly as it has in the past 7 years.

At least he would be looking at velocity.

I don't think you are aware of the difference between an accounting profit and an economic profit. "Economic profit of zero" means that you don't know any other way to make more money, not that your accounting profits are zero.

As I believe money is largely neutral, a targeting nominal GDP framework would not be harmful (nor helpful). But, as a gimmick, it might work to excite people, so it's worth a shot.

It is neutral in the long run, and non-neutral in the short run.

Or, money might be sometimes neutral in the short run and sometimes non-neutral in the short run.

That is the problem with market-monetarism. It relies on market participants always believing that monetary policy is always non-neutral in the short run (and that NGDP moves in the direction policymakers want it to move). I believe that this is an extreme position because:
- it has unstated assumptions about credit markets (can the policy, even if carried out, actually affect borrowers ability to get loans? What if institutional issues render some borrowers unable to get credit at any interest rate? See Bernanke's "Non-Monetary Effects" article).
- it has unstated assumptions about the durability of central bank tools (can the government take tools away? Andrew Jackson? If not so extreme, then see Title XI of the Dodd-Frank Act).
- it has unstated assumptions about the absence of other agencies that may or may not have related tools (prudential regulators may affect the ability of financial institutions to rebalance their portfolios when market duration changes, or when interest rates change, or...).
- the pattern of observed velocity since central banks expanded their balance sheets is inconsistent with the assertion that expanding the balance sheet was effective in the short run. In fairness to market monetarists, they would deny that the balance sheet was the correct measure of policy, but then we get the whole tautology problem.

The new money does not enter the economy everywhere equally. Upstream recipients are able to bid on resources before downstream recipients. Inflation is the steady transfer of purchasing power to upstream recipients from downstream recipients. The former group are the ones who employ economists.

Welcome back, AG; you've nailed it succinctly and accurately as usual.


Gdp is labor costs.

Pumping money into the economy but refusing to pay the money to labor merely cuts velocity.

I don't understand that bit about why the " steady transfer of purchasing power to upstream recipients from downstream recipients". Can you be more explicit or detailed about how precisely this functions?

+1 to tedm. Indeed, short term money is neutral (only 3.2% to 13.2% effect, out of 100%, from 1959-2001, in the USA due to Fed policy shocks says the econometrics paper by Ben S. Bernanke (FAVAR, 2002)). And velocity, a related concept, varies which as tedm says will make a mockery out of market monetarism.

Imagine this: Fed prints money, even helicopter drop, even giving it directly to the Fed as in the US Civil War (would require a change in the law but it can be done again) to spend, and, NGDP does not move. Because people anticipate tax increases in the future (Lucas critique as tedm implies). Then, when the Fed is 'credibly irresponsible' perhaps NGDP will jump--akin to a sort of Gould "Punctuated Equilibrium" in evolutionary biology--and we'll get inflation to spike, possible panic buying, possibly hyperinflation (doubtful but possible). In short, NGDP will not 'smoothly increase' but, like anything else in economics (Philips Curve, velocity of Mi), biology and human affairs, will jump around.

Sumner's NGDPLT framework is a farce and doomed to failure. But let's try it and see, no problem.

"As I believe money is largely neutral, a targeting nominal GDP framework would not be harmful (nor helpful). But, as a gimmick, it might work to excite people, so it’s worth a shot."

How many decades should it be tried to see if it's a gimmick that will change anything but velocity?

As long as the conservatives are hell bent on slashing labor costs come hell or high water, gdp will be sluggish or stagnant at best because that's the best liberals can manage when in the minority.

We have been operating on the free lunch economics theory that labor costs are a drag on the economy and by eliminating labor costs the gdp will soar.

How many more decades will it take before conservatives admit that eliminating labor costs eliminates gdp?

Reagan's growth happened because he hiked taxes to pay workers and borrowed to pay workers. And then HW and Clinton hiked taxes to pay workers, and Clinton-Gore regulated to hike labor costs.

The one sector creating a bit of gdp growth is healthough care which is regulation that creates new labor costs which means new gdp.

And the various energy policies, like CAFE regulations add labor costs adding to gdp, plus the tax loopholes come only by adding labor costs which adds to gdp.

But conservatives have slashed labor costs by letting capital assets decay and that drives down gdp.

And then conservatives call for more labor cost cuts, promising that less production will add to gdp.

More water mains leaking does not add to gdp! But not to conservatives who see ways to profit by hiking rents. The flooding from the high rains create wealth for the Trump's of the world. Higher rents from reduced capital stocks means wealth creation.

Mulp, I think we have common cause of reducing rents.

Conservatives, at least in the US, oppose our current level, and undocumented nature, of immigration. Increased competition of jobs depresses wages, and does in fact displace native workers. I don't begrudge someone from Mexico a job, but I'm not directly competing for a mechanic or roofing or harvesting job either. I think the left has done more, policy-wise, to deflate the cost of labor. (Which I'm not wholly opposed to) PS, your turn to be Maybe Its Just Me tomorrow. Make us proud!

@mulp- "How many more decades will it take before conservatives admit that eliminating labor costs eliminates gdp?" - you fall into the classic trap of the Fed "dual mandate" theory. It's the law but it's wrong. Quickly: GDP has rebounded since the Great Recession, but labor has not. Is this a problem? No. Machines are doing the work and/or 'overworked employees'. SO what? If you're unemployed and want to work, and can't, then just go on welfare. It's not the function of government to burden business to hire ZMP workers instead of building robots. It is not. BTW I've retired, despite being only middle aged, as I'm in the 1% due to a recent inheritance and owning DC real estate, but that's beside the point.

Once you get this around your head, and stop thinking like a 1930s economist (aka Keynes, or even his close cousin (sic) Friedman) you'll understand how the modern economy works.

PS--related concept: is stick wages just nominal hourly wages per employee? Or total wages paid by a firm to all its employees? I.e. not taking a pay cut from $10/hour to $9/hr is sticky wages? Or is it what the *firm* pays to *all* its employees? So a firm that cuts back on overtime --yet demands workers to work just as hard (nearly) as before--is giving all its employees a pay cut? True or false? Traditional economists from grandpa's era says "false" but in fact the answer is "true". Get it straight: there are no sticky wages either. Nearly everything taught to you in Economics 101/102, which is a synthesis of stuff in the US economy as happened post WWII, is wrong today. Completely wrong.

So, 8 million people all lost their jobs in 2009 because...?

... the assets which supported their employment were over-valued.

In other words, they never should have been employed in the first place. Fascinating.

How many people should we toss out of work today?

Lets pop some bubbles and find out

The market tosses people out of work all the time. If you were a realtor flipping homes for $500K in the high desert outside LA, you ended up out on your ear. That's what happened in 2008-09. That's the very essence of the free market: freedom to fail. That's why the bailout was pure banana republic economics: the rich were protected from becoming poor. GM, AIG, Goldman Sachs executives should have been out on the streets, watching their possessions being hauled out by judgment creditors in front of their weeping wives and mistresses.

Central bank machinations obscure price signals and distort investments. Then reality kicks in. Then the Fed papers it over. Lather, rinse, repeat. It is going to happen again in the next five years as well.

The A-G has been possessed by Andrew Mellon's ghost.

Your case here is that inflation allows us to keep everyone working, all the time. "Full employment" indeed!

It's sad that people are not capable of even imagining life under a sane monetary arrangement, so long have we wandered without one. And rather galling that they be so arrogant about it.

"In other words, they never should have been employed in the first place"

Seriously? That's not how bubbles work. Maybe SOME of them would not have been employed in the first place, but when a bubble pops the reaction is excessive, and at the bottom of the trough employment is almost certainly lower than it would have been in the absence of a bubble.

I assume you have some good reasoning on the matter, but I really don't think it pans out.

Shave the goatee, the louis ck look isn't impressive.

man is your website link legit, this is some crazy shit

I did a redraw on the optics at another site, a-b-l.org (Anti-Brainwashing League). When updates to materials are significant I share with media and many public officials. No idea how many check it. The information provided is also hosted at (https://uscach.org/), which was interviewed by the NY Times on the matter a few weeks ago.

I can track down the NYT link if you want. (Their previous article on the subject was headed with a photo of a man with a slightly malformed face, obviously (?) mentally disabled to a degree, and generally portrayed the issue as a matter of delusion and mental illness. The recent one seems a little more even-handed.)

If you look up "David Voigts" and his walk across America, you'll find the story of an ex-Navy officer who is walking across the country to promote awareness on the issue. He used to work in a division of the Navy which should be expected to have a degree of knowledge on such issues.

It's good for certain officials (at present, in an absence of democratic action on the matter, especially military and police, I believe largely for internal purposes). It can be like "here's a document roughly drawing the lines of what can be discussed without straying into classified materials" (unless you're EXPLICITLY not allowed to).

Also, social media outreach to find people who report such experiences and provide them with enough information to be able to credibly discuss the issue with friends, family, etc. Or, on the street.

As for the historical documentation and petitions for anti-brainwashing curriculum to be accepted (the stated goals), a lot of kinks have been ironed out to ensure scientific credibility and just as importantly to hopefully keep people reasonable if/once organized. But, it'd be great if that problem would just fix itself instead.

@ladderff, no, my argument is that under deflation, lots of people lose their jobs. The consensus seems to be that deflation exposes bullshit jobs or something, I'm not sure.

We have lived with low, persistent inflation for a century. We're still here, richer than ever. Perhaps we have suffered some societal decay, but are we now pinning THAT on inflation?

How many centuries, ladderff, until you let go of your hard money obsession?

If Krugman likes it, even just a little bit, then I hate it. Sorry but it's how I feel.

If he said water is wet I'd take a swim just to check. Also, whatever happened to Maybe Its Just Me? Perhaps we should take turns culturally appropriating his account. Mulp gets it tomorrow, Deco gets it thursday, nate on friday.

Sorry, but its just how I feel.

Monetary policy is sometimes offset by declines in velocity rather than changes in real output or the price level.


The assertion that aggregate demand is due entirely to central bank policy is founded upon several unproven premises - or, is based upon tautological definitions of aggregate demand and central bank policy. Market monetarists really need to provide much more detail about which tools they claim central banks have that are all-powerful, and which channels these tools operate through, and (most importantly) how these tools/channels are impervious to countervailing substitution by private actors or non-central bank government agencies. To see this, ask what determined aggregate demand in the United States during 1837 -1913? It wasn't the central bank, obviously.

https://fred.stlouisfed.org/graph/?g=5jS6 M1 and M1V
https://fred.stlouisfed.org/graph/?g=6K6l M1V, M2V, MZMV

The Fed has been pushing string but the private sector AND government is not pulling by paying labor costs because conservatives want gdp to shrink.

Well, conservative believe in free lunches. That they can not pay workers to create really really high profits but still have consumers spend like they were really really high paid workers soon to be paid even more.


But conservatives are dogmatic and are hanging on to their free lunch bone like bulldogs.

I've been hearing for most of my 70 years how we can adapt to inflation (hasn't worked all that well, imo). Why pray-tell can we not adapt to deflation? The Sham seems correct with his point about buying what you need not what they sell you. Curious minds and all that.

"Hasn't worked all that well"???

When there is deflation the dollar values of home mortgages/secured loans fall and they end up underwater causing bank failures etc. Maybe we could adapt to this but it would be a lot harder to borrow money, larger down payments or higher interest.

There is no market without failure. In the end you have a system where banks are middlemen for the government, taking their profits and being propped up by the taxpayers.

Joan: Sure! But this is like saying alcoholism is a point in favor of alcohol. There are ways of unwinding these inflated assets without blowing up the world.

Huh? Are you saying we have high inflation??

In the case of infrastructure construction, or the absolutely necessary for the public pro sports stadiums, the argument is always that it will be much cheaper to build it now rather than later.

For me, one of the nice advantages of NGDP targeting is that it doesn't require measuring inflation (which I think is not -- and probably can never be -- done accurately)

But doesnt it require measuring GDP, which is also inaccurate?

Sure there are data errors, but you don't have all the thorny issues of measuring quality improvements etc.

Actually, Cliff, the issues with measuring quality don't disappear with NGDP targeting. I am not at all sure where the idea ever came from that NGDP-t is somehow independent of price levels. I mean, yeah, the monetarists always claim they won't care whether or not NGDP is growing 5% a year because of zero real growth and 5% inflation vs 5% real growth and 0% inflation, or any other possible combination, but believing them requires ignoring an astonishing amount historical evidence.

Yeah, if you ignore chunks what the position actually [i]says[/i], it's doesnt make much sense, y'know?

WP - care to clarify?

The complaint is "market monetarists SAY that the NGDP target would be symmetric, but let's not believe them, and assume that they're really inflation and/or RGDP targeters. Then, the issue of measuring the price level becomes important again."

As I understand it, GDP includes non-productive, abstract services like legal billings, something that the federal and state governments have nourished beyond belief.

The advantage of NGDPLT is that it takes "inflation" out of the equation. No, it doesn't change the tools available to reach the target, just the semantics. If people are allergic to "inflation", don't use the term. Now, if we were to go to "real" NGDPLT, with a futures market for the NGDP target and a commitment by the Fed to buy or sell bonds based on whether the market is above (sell) or below (buy) the target, that would be much more than a semantic change. Detractors oppose such a market because the Fed would lose "control" of the money supply, while promoters (such as Scott Sumner) respond by saying that such a market would be dormant (no buying or selling) because the Fed would implement monetary stimulus or contraction intended to avoid the need to buy or sell (i.e., the target and the market would be the same). Whether one believes in "real" NGDPLT depends on whether one believes markets know more than people (i.e.., the Fed economists).

With apologies to Sumner, ignore my reference to him in my comment. Instead, I encourage readers to review the many blog posts and articles Sumner has written on the subject of market monetarism.

Sumner is a sham, like Sam. NGDP will not increase "smoothly" as Sumner thinks, but will jump around, not unlike velocity. And sincere there is little if any money illusion, nor sticky wages, and since money is short term neutral, NGDPLT will not work anyway. And reading Sumner's blog is like reading the worse mystery writer around: no making sense of his analogies, and it's all just like obfuscated code and mud. Perhaps by design (if nobody knows what you mean, you can never be wrong).

Yet you keep coming back, like a dog to its own vomit.

For once I agree with Ray Lopez, at least the core of it. What exactly is the procedure to get this smooth NGDP curve?

If people are allergic to "inflation", don't use the term

Perhaps we should stop calling it inflation and start calling it a banana instead.

"I’ve been hearing plenty of calls for a higher inflation target, perhaps four percent."

Why should there be a "target" for inflation? And, in fact, why should there be any artificial manipulation of money by institutional/government means rather than the market itself? The idea that there are people, and they are people, with all the intellectual vagaries common to the species, can legitimately and effectively determine the economic fate of millions of others is preposterous. It's also undemocratic, if you're in to that sort of thing.

Economists who would laugh you out of the room for proposing to have a central committee determine the supply of plywood believe a central committee can determine the "correct" supply of money and credit.

I once heard

"Central banks fail for the same reason centrally planed economies do."

I think thats about right.

These arguments are really nonsensical. The central bank has no choice but to determine the money supply. No one else can do it.

Everybody else did it. For millennia.

Are you talking about barter???

No. Indirect exchange via currency precedes modern central banking by millennia. Back before we had Facebook and xBox.

This is almost certainly wrong- if it weren't, we wouldn't be in the position where we are today, moving towards negative rates everywhere. I think, with good justification, that what the Fed considers money isn't what the market uses as money, and that has led them down a dead end. Really, what are those 3 trillion in dead reserves held at the Fed? Are they money, or is the market itself using something different, like for example credit dollars, which have expanded and contracted over time?

What if there is no central bank? The Fed was founded in ... when was it again? What was going on before then?

There are exceptions to everything. Everyone knows, for example, that labor markets are the great exception to supply and demand. The higher the supply of cheap foreign labor, the higher the wages of domestic labor. Clearly, planning the supply of money is an exception to the observations about central planning.

>There are exceptions to everything.

Well... not always.

Anyone who says this sort of thing should be clear they are advocating the abolition of central banking and the return of, what? Barter?

I'm not one who thinks we need to get rid of the Fed, but there was money before central banking. You don't have to go all the way back to barter.

It's better with central banking IMO, but it's not required.

Currency didn't exist until the central bank. Who knew! We've used wampum, Yap, silver, gold, nuka cola caps, even certificates of deposit in the dark ages before central banking, and it worked ok. Not perfect, but the Fed ain't perfect neither.

"Why should there be a 'target' for inflation? And, in fact, why should there be any artificial manipulation of money by institutional/government means rather than the market itself?"

Who is creating the money? If money is being created, doesn't there have to be some sort of plan about how to do it?

The thing is this: whether rationally or not, the American public hates higher rates of price inflation.

Wasn't the average inflation ~5% in the 1980s and ~3% in the 1990s? So why do you assume the American public hates higher rates? That said, I think the problem is not 2 or 4% inflation but the working population age decrease in the developed world is creating deflationary environments and stagnant working class wages are not going up.

The decreasing inflation rate since the early 1980's was a great tail-wind to the American economy. Now that tail-wind is gone. So too is the benefit of the "baby boomer" demographic hitting its peak spending years. In the absence of these positive trends the policy-makers hope to provide the artificial substitute of perpetual monetary easing. But such stimulus is not the same. Case in point is what collin observed. Pulling levers at the central bank will not and can not change the wage pressure experienced by the working class.

"The decreasing inflation rate since the early 1980’s was a great tail-wind to the American economy."

Maybe. But in a market as fluid, large and complex as the one in the USA, you've probably gotta be well into the 10-20% range before it's a huge problem. The standard arguments against high inflation are very sensible, but, "great tail-wind"? The direction of the effect is theoretically almost certain, but the causes of 1990s growth are much more like to be related to finally starting to recoup on investments in IT, and possibly the reduction in public resources allocated to military expenditures that was made possible by the end of the Cold War.

"stagnant working class wages are not going up."

Wages don't need to go up in the absence of inflation. In fact, deflation is a positive for those with static or fixed incomes. But individual saving is detrimental to the investment/finance universe, which needs inflation as a hazard to savings, encouraging investment and allowing them to take their cut of the productivity pie.

Vanguard is eating Wall Street's lunch. Maybe you haven't heard.

No credit for stuffing money in mattress. Sorry.

If you're so worried about hoarding cash, you must be furious about negative interest rates, right? Because that would be something we'd have common cause.

I'm not happy with negative interest rates, which we've had for six years now because of inflation. I used to think that a positive real interest rate was a law of nature because of time preference, but now I realize that holders of wealth have carrying costs; they could get robbed, real assets depreciate, gold seems to work ok, but only at preserving, rather than increasing, purchasing power, and may be prepared to accept a modest haircut for wealth storage.

But it's not the Fed holding rates dwon at this point. Yellen has been itching to raise rates for a year. She raised rates in December and long-term yields have fallen 0.75% since then at all-time lows. That's the market, not the Fed.

Anyway, how much interest would you pay someone for a loan he could recall at any time? Interest on demand deposits seems like a tricky game.

There are positive interest rates out there- you just can't demand the right of immediate withdrawal. You can protect yourself against inflation and even lock in a meager positive real rate of return with a 10-year TIP.

Holding gold vs dolla dolla bills has recently been a good vehicle for increasing purchasing power. The VALUE of gold is more or less stable, yes, but as long as you debase currency, you're feeding the gold bugs by increasing its PRICE. An important distinction where inflation or deflation are concerned.

Yellen will lower rates before she raises them, is where my money lies. The Fed has lost the script at this point, and largely tries to signal confidence and competence.

Working class compensation continues to rise

Working class purchasing power is not.

Yea I believe real wages have gone up but it really only started in 2014. (Partially because that is when the price of oil dropped significantly.)

I suspect it will continue but at a slow rate.

If productivity grows at 1% a year, I'd expect (in the sense of, as a worker I would expect this) over the course of 20 or 30 years to see at least a good 10-15% increase in real wages, all else equal.

Here's the easiest way to sell this, without giving up the 2% inflation goal. And yes, it 's a goal, not a target. If it were a target then there would be no dual mandate:

1. Set a NGDP target at the Fed's estimate of long run RGDP trend growth, plus 2%.

2. Every five or ten years re-estimate the long run trend RGDP growth, and (slightly) adjust the NGDP target accordingly.

3. Do level targeting.

They won't get exactly 2% inflation in the long run, but they will actually get closer to 2% than they do now.

The Fed can tell Congress with a straight face that they are aiming for 2% inflation, but with some countercyclical fluctuations to address the dual mandate (employment) THAT THEY ARE ALREADY LEGALLY REQUIRED TO ADDRESS IN ADDITION TO INFLATION.

This isn't rocket science.

What's the level targeting algorithm?

The Fed can tell Congress that NGDP is the intermediate goal and inflation is the long run goal.

Wow. I didn't realize the Fed was that independent. I thought the Central Bank was normally in charge of independently meeting goals and refusing political interference in meeting those goals, not to set the goals themselves (although surely they would be a good source of advice on the matter).

I think Dr. Sumner is referring to the overall strategy of "Dual Mandate", which is dictated by Congress, not the specific tactical decisions to meet that goal. Rats, I see TC has deleted my long as post on why the US going off the gold standard in 1933 is not a good example of recovery using monetary policy...oh well, your loss reader. You can read Sumner's book for the opposite view.

Oh ,sorry, it's downstream, not deleted. My masterpiece flamebait and arguably even true.

Cowen's newfound affection for NGDP targeting dovetails with his affection for his new best friends John Cochrane and father in law. I understand that Cochrane, like Sumner, would defer to markets to implement monetary policy (after adopting NGDP targets), the difference being that Cochrane would opt for TIPS spreads targeting while Sumner would opt for a NGDP futures market. From the comments I have the impression that not everyone appreciates the significance of NGDP targeting: the Fed would have nothing to do and no reason to meet, as monetary policy would be put on auto pilot (once the NGDP target is established, not a difficult task as compared to, for example, targeting inflation). At least that's the theory as I understand it. I suppose it would put to the test Cochrane's Bizarro World (in which low interest rates cause deflation and a low NGDP growth rate). But that's only a secondary benefit; the primary benefit would be that the interventionists (the do something crowd) would be neutered. What would the Keynesians do? I suppose attend meetings of fellow Keynesians.

"The thing is this: whether rationally or not, the American public hates higher rates of price inflation. Perhaps they mis-sample or mis-estimate prices, or perhaps the higher prices really do erode their real wages in a way they can’t get back through a new labor market bargain."

Illustrates the limits to aggregation. The 59 million people whose social security benefits are indexed to inflation and who are disproportionately politically active probably look at inflation differently than the 151 million who are employed. On the other hand, they are particularly sensitive to inflation in specific products that they tend to consume relatively more of as well such as prescription drugs. http://www.ajmc.com/focus-of-the-week/0316/aarp-finds-seniors-hit-hard-as-drug-price-hikes-outstrip-inflation NGDP targeting will not resolve such contradictions.

NGDP targeting is just a deception to try to make a higher inflation target palatable. One of the dangers of GDP targeting is that there are no end of people who have unrealistic ideas of what real growth should be (quite apart from all of the technical difficulties of defining and measuring GDP or inflation).

It seems to me that the people who want higher inflation have fallen into a correlation / causation fallacy. "Inflation was high when the economy was booming therefore if we could get inflation higher, the economy would boom" - complete freaking nonsense.

The calls for "helicopter money" are really a call for bureaucrats to seize control of the public purse from the elected officials. That slippery slope has a name and it is fascism.

The point is to avoid the zero boundary

Wouldn't the impact of inflation/deflation be dependent upon the degree to which these price changes were loaded into people's assumptions about the future?

That is to say, a theoretical universe where prices fell by 1-2% per year [Rather than the reverse] wouldn't necessarily be a universe with a 0% nominal rate on demand deposits [and thus a 2% real rate on demand deposits] nor would it be a universe where nominal wages increased at the same clip as they had previously.

Of course if monetary policy is non-neutral both in it's long term macroeconomic impact and also in terms of impacting sectors of the economy differently, then suddenly the debate about whether annual prices should be increasing or decreasing becomes relevant.

I'd rather have prices reflect supply and demand rather than reflect what tenured macro-economists with lockstep salaries think they should be.

Prices as allocators are not injured by attempts to contain growth of the general price level.

What if the attempt is based on CPI?

BANGKOK (Reuters) – Thailand’s central bank governor said on Tuesday a rapid rise in the baht was not good for the country’s economic recovery although it was not causing exports to decline.
Thai exports have faced several problems, including falling behind in technology innovation and a slow recovery in export markets, Bank of Thailand Governor Veerathai Santiprabhob, told reporters. But the baht’s rapid appreciation in certain periods “is not conducive to the economic recovery and the central bank will closely monitor it,” he said.
The baht was at 34.62 per dollar on Tuesday, hovering around its highest level in more than a year, driven by foreign fund inflows.
The currency has risen by 4% against the dollar this year, and Veerathai said its strength was not greater than other regional currencies.
The central bank expects exports to fall for a fourth straight year in 2016.
(Reporting by Kitiphong Thaichareon; Writing by Orathai Sriring; Editing by Jacqueline Wong)

Very good sentences:

"Under nominal gdp targeting, the rate of price inflation would not have to significantly rise until worse times were upon us. That is precisely when such upward price pressures would be most useful."

Counter-cyclical inflation. Yeah.

Most NGDP advocates say the target should be 5% annual growth.

Over the last four years nominal GDP growth has averaged 3.8%.

So what should have the Fed done differently to hit the 5% target?

The NGDPT folks say keep printing and buying assets, QE for bonds, stocks, whatever it takes. If the Fed can't get NGDP up that way they end up owning the whole world. Which is absurd so at some point before that the effect will happen. The risk is does it require so much printing that instead of rising steadily to the target and then stopping the tipping point happens and we are Zimbabwe.

I think the NGDPT crowd is too dismissive of that risk, but I would still be interested in the idea with more thought put into what happens then.

Your trying to hard. Nothing in your post would create "Zimbabwe". Modern Central Banks, are vastly over examined. There overall influence is just a bit overrated. If they are buying up everything, then the system is dead and it wouldn't matter.

I think NGDP should be about 4%. The Boomers are gone and we are a consumption based economy. You aren't going to get the wild swings of yesteryear. 5-6% sounds like a boom that will go bust down the road as it would probably trigger a boom in inventory build.

hehehe, sounds like a big nominal "spurt" to growth is coming in Q3. to much backward looking drivel in this thread.

Cycles and inflation are heavily driven by the type of growth, size of population and very underrated, inventory control.

This looks to me like:

"We need inflation, but that irrational public won't take their medicine. So let's mix it into their juice."

(When we tried this with our three-year-old, she said afterwards: "No medicine juice!")

So you stopped giving her the medicine she needs going forward?

Heck no. We've just become more honest about it going forward. Apparently, even a toddler can't be fooled for long.

And so with inflation targeting -- which I favor in significant part for transparency reasons.

On people not liking inflation even though it shouldn't matter.

Even you can are in a position to get that cost of living increase, it doesn't come on its own. I haven't run into many employers who approach people who work for them and say "hey, it looks like inflation is kind of high this year, do you want a raise?"

From there, all the regular stresses and antics - maybe they can you because you asked for too much, excuses about other rising costs, or whatever ... y'know, wage negotiations.

Australia is now seriously debating NGDP targeting, including in the Senate: http://johnquiggin.com/2016/08/22/abandon-inflation-targeting-while-we-still-have-time/

This is Tyler's daftest idea.

1 - No one would be confused by the nominal difference between targeting higher NGDP growth and targeting higher inflation. Anybody who hates higher inflation would hate it just the same with a higher NGDP growth label on it.

2 - You're not making a serious proposal until you explain exactly how NGDP targeting would work. "Expanding the range of assets the Fed can buy" is too vague to know what you mean. If I had to guess what you mean I would say you're talking about the Fed buying corporate bonds, which would mean the Fed setting some criteria for which bonds it would buy, which in practical terms would probably mean delegating the job of selecting discounted-credit-worthy companies to the ratings agencies. The various reasons this could either go very wrong or not do much should be obvious. But again, I'm just guessing what you're proposing, you're not spelling it out. It frankly reminds of the academic marxists always suggesting they have some new humane kind of socialism in mind and refusing to be drawn on what that would be.

It’s tough to say whether this is a good idea or not, but one got to be careful with what we do on personal levels. I am always careful with how I go about everything and it helps a lot with broker like OctaFX since they always support me through their facilities and feature that counts with swap free account, bonuses, rebates and much more, so it all works in my favor and allows me to trade in ever smoothly without much difficulty at all!

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